From the Empirical Archives: A Rich Country by Hugh Mercer Curtler

A Rich Country

Hugh Mercer Curtler

Originally published in the December 2012 issue of Empirical

In one of his travel notes written in 1788, Thomas Jefferson wrote, “What a cruel reflection, that a rich country cannot long be a free one.” He was even then concerned about America’s preoccupation with the accumulation of wealth as an end in itself. As Jefferson saw it, the reason wealth interferes with freedom is to be found in the captive nature of avarice.

As it happens, Aristotle had the same thought more than two thousand years before Jefferson when he attributed the breakdown of aristocracies to the unnecessary accumulation of wealth; the aristocracy degenerated into an oligarchy, rule by the rich. The problem as Aristotle saw it was that the rulers lose sight of the common good out of a growing concern with their own self-interest.

Jefferson, along with other eighteenth-century American thinkers, came to call concern with the common good “public virtue.” It was supposed to be a republican virtue and should keep men away from the lure of self-interest and the accumulation of unnecessary wealth and luxuries. But both of these thinkers were putting their fingers on a central problem that worried the founders of this nation: what are the effects of unnecessary wealth on a republic?

In The Creation of the American Republic 1776-1787, Gordon Wood, quoting from a sermon delivered in 1778 by the Rev. Payson, has this interesting paragraph for us to ponder: Because it was commonly understood that “the exorbitant wealth of individuals” had a “most baneful influence” on the maintenance of republican governments and “therefore should be carefully guarded against,” some Whigs were even willing to go so far as to advocate agrarian legislation limiting the amount of property an individual could hold and “sumptuary laws against luxury, plays, etc. and extravagant expenses in dress, diet, and the like.”

Though a number of the framers of our Constitution were themselves deists, we must recall the prevailing influence of both the Puritans and the Quakers on the minds of those who prepared the nation to revolt against England. This is especially so in an age in which the conservative element among us tends to emphasize the influence of the Christian religion on the founders of this nation while at the same time they promote the conflicting myth of free enterprise capitalism–which was never regarded as an ideal in the minds of the colonists. In fact the early colonists insisted that “commerce. . . had destroyed England’s soul”; it was beneath the true calling of human beings who are at their best when they remain close to the earth and control their appetites and desires.

Much of this thinking stemmed from their reading of the New Testament, of course. But many of them were avid readers of history and were convinced that excessive wealth and luxuries were among the major causes of the downfall of the Roman republic, which they greatly admired. They advocated “enterprise,” to be sure, but there were both legal and moral restraints in many of the colonies against the unlimited gathering of wealth and luxuries–laws against entail, primogeniture, and even monopolies. Indeed, as Wood tells us, “A preliminary draft of Pennsylvania’s Declaration of Rights even contained an article stating ‘that an enormous Proportion of Property vested in a few individuals is dangerous to the Rights and destructive of the Common Happiness of Mankind,’ and therefore should be discouraged by the laws of the state.”

The very problems the colonists were most concerned about have come to pass largely as a result of the combination of the role of very wealthy individuals–like the Koch brothers–and multi-nationals, who have bottomless pockets when it comes to playing poker at the political table. The rest of us hope to get by by bluffing. Let me expand. According to the American Association for Justice, the Koch brothers fund the political group called “American Legislative Exchange Council” that involves thousands of legislators around the country who push bills through that favor the corporations at the cost of the health and well-being of the majority of the population.

Judged from the perspective of Jefferson’s America, such people and such groups are a big part of what is wrong with this country today. As of this writing, the Koch brothers allegedly plan to spend $400 million of their hard-earned money to get Obama out of the White House and keep control of the Congress. They might succeed, of course, because money talks; and after the Citizens United decision by the Supreme Court, the amount of money spent by the wealthy on the November elections could buy a small country–or a large one that’s deep in debt. After all, the family oil business the Koch brothers own rakes in an estimated $100 billion a year. The sky’s the limit!

But note the irony in the fact that people like this will spend millions of dollars to buy politicians who will guarantee that they get to keep most if not all of their wealth in the future. I dare say they see it as an investment. Some of the wealthy 1%, I understand, even buy politicians on both sides of the political aisle. 

That way they can’t lose.

The interesting question is what on earth the founders would say about this turn of events. They were suspicious of capitalism in its raw forms. As mentioned, a number of the colonies had restrictions on the unfettered growth of capitalism. They saw that as a sure way to aristocracy which they distrusted almost as much as they did royalty. Many were still wedded to the comfortable notion of mercantilism, which was what they were used to as British citizens; it favored the involvement of the government in the financial affairs of its citizens. These were men who, for the most part, knew that humans left to their own wiles would get into a dog-eat-dog fight over wealth and they didn’t want to see that either.

People like Jefferson saw the future of this country in terms of a paradigm in which people would remain close to the earth or own small businesses and earn enough money to be content and have whatever they required to live a good life, but no more. “More” was not necessary and it could lead to moral blindness. Initially the founders, especially the Southerners, didn’t even want a federal bank, though Alexander Hamilton finally persuaded them to go in that direction–as a matter of necessity. And many of the wealthy citizens helped support the young nation (and the revolution) with money out of their own pockets. This was the way to practice “public virtue.”

The attitude toward money in this country in the eighteenth century was quite different from ours now. For the most part money was seen as a means to an end, simply. There were remnants of a deep-seated medieval distrust of money and what it did to people–ultimately stemming from Christ’s admonitions regarding the rich in the New Testament. Just read Dante’s Inferno and try to figure out how many of those in Hell are there because of their relentless greed! That attitude took centuries to die out, but it is now pretty much a thing of the past as, thanks to people like John Calvin, we think that wealth is a sign of talent, ability, and even, perhaps, God’s favor. You cannot have too much. If you do, you can always go out and buy yourself a government–like the Koch brothers.

There are lessons here for us to learn. We like to think we live in a Democracy even though the founders saw it as a republic governed by representatives, not the people themselves. The people were not thought to be wise enough to govern themselves, though through education they would learn to practice public virtue and at least come to recognize those around them who were worthy of elected office. And some would become well enough educated to lead the others. This is why Jefferson established the University of Virginia: he saw education as essential, especially in a republic. Those who remained in school long enough would be recognized as especially able and elected to public office. The cream would rise to the top. 

Jefferson envisioned a “natural aristocracy” governed by the brightest and best minds the country could produce. James Madison tended to agree with him–as he did on so many other issues. The idea goes back at least as far as Plato’s Republic. But it is clear that, as Aristotle foresaw, our “natural aristocracy” has degenerated into an oligarchy–given the fact that those with great wealth are the ones who choose those who govern and later tell them how to govern. And the wealthy are clearly preoccupied with their own self interest in the form of maximum profits. So Aristotle was correct in his notion of what factors lead to the degeneration of an aristocracy, even though he saw an aristocracy in a different light than Jefferson did. And Jefferson, echoing the Rev. Payson, was also correct in saying that a rich nation could not long remain a free one. 

Let me explain.

By world standards ours is a very rich country, though it is the top 1% who have the bulk of the wealth. But our conviction that we are one of the freest nations on earth is based on the misperception of what freedom is: that it is a function of the number of choices we have rather than our ability to decide for ourselves what is worth choosing. We do have a great many choices, heaven knows. But this is what Isaiah Berlin called “negative liberty” and it is clearly a part of what freedom is all about–we must be free from restraint in order to act at all. And we must have a variety of things to choose from. But Berlin also focused attention on “positive liberty,” or the freedom to choose intelligently, which comes from knowledge and awareness of implications. To the extent that we are unaware of what is going on about us, we as a nation fail to achieve positive freedom. As long as the wealthy continue to control the governing body, not to mention the media, whereby they are able to divert attention with entertainment and games, we will continue to maintain the illusion that we are free because we have negative liberty. We can choose the channels we want to watch: more is better. But until or unless we also have positive liberty, unless we come to know which channels are worth watching, we are not truly free–not fully free in human terms. Free citizens know which candidates are worthy of public office and will elect them accordingly. 

That was Jefferson’s dream.

It is not likely that the wealthy will give up their wealth. And as long as they can buy politicians who will pass the laws that give them tax breaks and subsidies, they will simply continue to amass photo : Charlie Nguyen wealth–while insisting all the while, incorrectly, that they are realizing the ideals of the founders of this nation. Thus, if the citizens of this nation are to regain any semblance of their full human freedom, the only hope is education whereby we come to know what freedom is and realize that it does not come down to the number of loaves of bread on the shelves at the local box store, or the number of cars at the dealership. As suggested above, freedom is a function of knowing which bread is healthy and which cars are the lemons: it is a function of knowledge and the capacity to think about what we know. Job training certainly won’t get us there, though it is what the wealthy want us to embrace and what the schools are currently focused upon. It is only through education properly conceived that we can realize this capacity to make informed choices. That is why a liberal education is vital to our political system as originally conceived: it sets us free and keeps us free. 

Let us be clear about this.

Liberal education properly pursued leads to the ability to use one’s mind. One would hope, therefore, that everyone in this country, if not the world, would want as much as possible. But we confuse schooling with education, despite the fact that there are a great many people who are well-schooled but who are badly mis educated. They may be well-trained to do a particular thing, but they cannot use their minds and are captives of every intellectual fad that passes their way. This is the result of job training, and while corporate CEOs will complain from time to time that their employees can’t use their minds properly–they can’t speak coherently, write a clear memo, or organize their thoughts–they would really prefer that these people simply do what they are asked to do. Otherwise, why aren’t the corporations taking the lead to make this nation first in the developed world in education instead of being, as it is, among the last? It is not America that leads the developed world in education; it is tiny Finland.

In a republic like ours, it is essential that all citizens acquire the capacity to use their minds, to know whether or not they are being led astray–to keep an open mind, stay on top of what is going on around them, and think their way through all the nonsense to see if there is a kernel of substance at the center. Liberal education properly pursued will assuredly lead to this end. But even if schools do their job and lead us down the path to an education, it does not stop there. Education properly conceived, lasts a lifetime. In the end, it would appear that Jefferson was right. Corporate wealth which controls the political machinery in this country is at loggerheads with both the ideals of this republic, and in so far as it fosters job training in the place of education, it also limits the possibilities that the citizens of this republic can remain free.

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From the Empirical Archives: Nationalize Money, Not Banks by Herman Daly

Nationalize Money, Not Banks

Herman Daly

Originally published in the November 2012 issue of Empirical

If our present banking system, in addition to fraudulent and corrupt, also seems “screwy” to you, it should. Why should money, a public utility (serving the public as medium of exchange, store of value, and unit of account), be largely the by-product of private lending and borrowing? Is that really an improvement over being a by-product of private gold mining, as it was under the gold standard? The best way to sabotage a system is hobble it by tying together two of its separate parts, creating an unnecessary and obstructive connection. Why should the public pay interest to the private banking sector to provide a medium of exchange that the government can provide at little or no cost? Why should seigniorage (profit to the issuer of fiat money) go largely to the private sector rather than entirely to the government (the commonwealth)?

Is there not a better away? Yes, there is. We need not go back to the gold standard. Keep fiat money, but move from fractional reserve banking to a system of 100% reserve requirements. The change need not be abrupt–we could gradually raise the reserve requirement to 100%. Already the Fed has the authority to change reserve requirements but seldom uses it. This would put control of the money supply and seigniorage entirely with the government rather than largely with private banks. Banks would no longer be able to live the alchemist’s dream by creating money out of nothing and lending it at interest. All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements.

Banks cannot create money under 100% reserves (the reserve deposit multiplier would be unity), and banks would earn their profit by financial intermediation only, lending savers’ money for them (charging a loan rate higher than the rate paid to savings or “time-account” depositors) and charging for checking, safekeeping, and other services. With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a depositor (and not available to the depositor during the period of the loan), thereby re establishing the classical balance between abstinence and investment.

With credit limited by saving (abstinence from consumption) there will be less lending and borrowing and it will be done more carefully–no more easy credit to finance the leveraged purchase of “assets” that are nothing but bets on dodgy debts. To make up for the decline and eventual elimination of bank-created, interest-bearing money, the government can pay some of its expenses by issuing more non-interestbearing fiat money. However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public voluntarily wants to hold, the public will trade soon as the price index begins to rise, the government must print less and tax more.

Thus a policy of maintaining a constant price index would govern the internal value of the dollar. The external value of the dollar could be left to freely fluctuating exchange rates.

Alternatively, if we instituted Keynes’ international clearing union, the external value of the dollar, along with that of all other currencies, could be set relative to the bancor, a common denominator accounting unit used by the payments union. The bancor would serve as an international reserve currency for settling trade imbalances–a kind of “gold substitute.” The United States opposed Keynes’ plan at Bretton Woods precisely because under it the dollar would not function as the world’s reserve currency, and the US would lose the enormous international subsidy that results from all countries having to hold large transaction balances in dollars. The payments union would settle trade balances multilaterally. Each country would have a net trade balance with the rest of the world (with the payments union) in bancor units. Any country running a persistent deficit would be charged a penalty, and if continued would have its currency devalued relative to the bancor.

But persistent surplus countries would also be charged a penalty, and if the surplus persisted their currency would suffer an appreciation relative to the bancor. The goal was balanced trade, and both surplus and deficit nations would be expected to take measures to bring their trade into balance. With trade in near balance there would be little need for a world reserve currency, and what need there was could be met by the bancor.

Freely fluctuating exchange rates would also in theory keep trade balanced and reduce or eliminate the need for a world reserve currency. Which system would be better is a complicated issue not pursued here. In either case the IMF could be abolished since there would be little need for financing trade imbalances (the IMF’s main purpose) in a regime whose goal is to eliminate trade imbalances.

Returning to domestic institutions, the Treasury would replace the Fed (which is owned by and operated in the interests of the commercial banks). The interest rate would no longer be a target policy variable, but rather left to market forces. The target variables of the Treasury would be the money supply and the price index. The treasury would print and spend into circulation for public purposes as much money as the public voluntarily wants to hold. When the price index begins to rise it must cease printing money and finance any additional public expenditures by taxing or borrowing from the public (not from itself ). The policy of maintaining a constant price index effectively gives the fiat currency the “backing” of the basket of commodities in the price index.

In the 1920s the leading academic economists, Frank Knight of Chicago and Irving Fisher of Yale, along with others including underground economist and Nobel Laureate in Chemistry, Frederick Soddy, strongly advocated a policy of 100% reserves for commercial banks. Why did this suggestion for financial reform disappear from discussion?

The best answer I have received is that the Great Depression and subsequent Keynesian emphasis on growth swept it aside because limiting bank lending to actual savings was too restrictive on growth, which became the big panacea. Also there is the obvious vested interest of commercial banks in retaining the privilege of creating money and lending it at interest.

Now suppose for a moment that aggregate growth has begun to increase environmental and social costs faster than production benefits, thus becoming uneconomic growth. There is much evidence that this is the case. Then a financial constraint on growth (balancing investment with abstinence) would be much needed, and 100% reserves would be a good way to accomplish it. If, however, growth remains the summum bonum of the economy, then we will inevitably borrow against our hoped-for larger future income to finance the investments needed to produce it. Financing investment by saving would require reduced present consumption, and that will be deemed an unacceptable drag on growth. But real growth has encountered the biophysical and social limits of a full world. Financial growth is being stimulated ever more in the hope that it will pull real growth behind it, but it is in fact pushing uneconomic growth–growth of illth. Since illth is negative wealth it can hardly redeem the growing debt that is financing it.

The original 100% reserve proponents mentioned above were in favor of aggregate growth, but wanted it to be steady growth in wealth, not speculative boom and bust cycles. Soddy was especially cautious about uncontrolled physical growth, but his main concern was with the symbolic financial system and its disconnect from the real system that it was supposed to symbolize. The result was confusion between wealth and debt. One need not advocate a steady-state economy to favor 100% reserves, but if one does favor a steady state the attractions of 100% reserves are increased.

How would the 100% reserve system serve the steady-state economy?

First, as just mentioned it would restrict borrowing for new investment to existing savings, greatly reducing speculative growth ventures–for example, the leveraging of stock purchases with huge amounts of borrowed money (created by banks ex nihilo rather than saved out of past earnings) would be severely limited. Down payment on houses would be much higher, and consumer credit would be greatly diminished. Credit cards would become debit cards. Long-term lending would have to be financed by long-term time deposits, or by carefully sequenced rolling over of shorter-term deposits. Growth economists will scream, but a steady-state economy does not aim to grow, for the very good reason that growth has become uneconomic.

Second, the money supply no longer has to grow in order for people to pay back the principal plus the interest required by the loan responsible for the money’s very existence in the first place. The repayment of old loans with interest continually threatens to diminish the money supply unless new loans compensate. With 100% reserves, money becomes neutral with respect to growth rather than biasing the system toward growth by requiring more loans just to keep the money supply from shrinking.

Third, the financial sector will no longer be able to capture such a large share of the nation’s profits (around 40%!), freeing some smart people for more productive, less parasitic, activity. 

Fourth, the money supply would no longer expand during a boom, when banks like to loan lots of money, and contract during a recession, when banks try to collect outstanding debts, thereby reinforcing the cyclical tendency of the economy.

Fifth, with 100% reserves there is no danger of a run on a bank leading to a cascading collapse of the credit pyramid, and the FDIC could be abolished, along with its consequent moral hazard. The danger of collapse of the whole payment system due to the failure of one or two “too big to fail” banks would be eliminated. Congress then could not be frightened into giving huge bailouts to some banks to avoid the “contagion” of failure because the money supply is no longer controlled by the private banks. Any given bank could fail by making imprudent loans, but its failure, even if a large bank, would not disrupt the public utility function of money. The club that the banks used to beat Congress into giving bailouts would have been taken away.

Sixth, the explicit policy of a constant price index would reduce fears of inflation and the resultant quest to accumulate more as a protection against inflation. Also, it in effect provides a multi-commodity backing to our fiat money.

Seventh, a regime of fluctuating exchange rates automatically balances international trade accounts, eliminating big surpluses and deficits. US consumption growth would be reduced without its deficit; Chinese production growth would be reduced without its surplus. By making balance-of-payments lending unnecessary, fluctuating exchange rates (or Keynes’ international clearing union) would greatly shrink the role of the IMF and its “conditionalities.”

To dismiss such sound policies as “extreme” in the face of the repeatedly demonstrated colossal fraudulence of our current financial system is quite absurd. The idea is not to nationalize banks, but to nationalize money, which is a natural public utility in the first place. The fact that this idea is hardly discussed today, in spite of its distinguished intellectual ancestry and common sense, is testimony to the power of vested interests over good ideas. It is also testimony to the veto power that our growth fetish exercises over the thinking of economists today.

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BREAKING NEWS: Final Approval To Suspend Legal Limit of National Debt

Debt Ceiling Suspended
Dan O'Brien

According to the Washington Post, final approval for a plan to temporarily suspend the legal limit of the national debt has been put into play. A 64-34 vote was passed on to the President for final approval and the signature of the Oval office. The ability to continue to borrow in light of a potential default pushes back a possible default until August and allows the lights to stay on. Previous estimations have the government running out of funds by March. On May 19th the limit will be reinstated and the ticking time clock will be activated once more. There will be a proposed $450 billion dollars added to the debt during the suspension of the legal limit. March will still mark the need for renewed budget talks, but it appears a band-aid has been applied for the time being.

View some of our other economics articles:

Gar Alperovitz: Money, Time, and Real Freedom

Olav Bryant Smith: Considering the Seven Biggest Economic Lies

Emanuel Stoakes: A Tale of Two Crashes Part I

Emanuel Stoakes: A Tale of Two Crashes Part II

From the Empirical Archives: Considering "The Seven Biggest Economic Lies"

Considering "The Seven Biggest Economic Lies"

Olav Bryant Smith

ILLUSTRATION: Steve Ferchaud

Originally Published in the May 2012 Issue of Empirical

One of the leading progressive voices in contemporary economics is Robert Reich, the former Secretary of Labor from the Clinton Administration and Chancellor’s Professor of Public Policy at the University of California, Berkeley. Recently, he launched a YouTube video that went viral. The reason for its popularity is clear. In seven simple steps, or in just two and a half minutes as Dr. Reich proudly announces at its commencement, this video entitled “The Seven Biggest Economic Lies” directly confronts the dubious claims we are most likely to hear from what he calls the “regressive forces” at work in our country. What faster way could there be to gain some enlightenment in economics? Ah, the blessings of YouTube.

“Big lies,” Professor Reich begins, “begin to be believed unless they are rebutted with the truth.” So, one dubious claim at a time, he counters with the facts. Please check out his video sometime. But in the meantime, this summary can get you started, and may be useful in remembering his points.

1

“Tax cuts for the rich trickle down to everyone else.”

The facts:

• Taxes were cut under both the Reagan and first Bush administrations.
• Median hourly wages stagnated and dropped.

Reich calls this trickle-down claim “boloney” and “a cruel joke.” It should be remembered, too, that the senior George W. Bush, when campaigning against Ronald Reagan, called this approach “voodoo economics.”

2 

“Higher taxes on the rich would hurt the economy and slow down job growth.”

The facts:

• The top tax rate was over 70% between World War II and 1981.
• Taxes have decreased considerably since 1981.
• The economy grew faster prior to 1981 than it has since.
• Most jobs are created by small businesses.
• Fewer than 2% of small business owners are in the top tax bracket.

On his blog, considering the same topic, Reich lays out in more detail that “From the end of World War II until 1981, the richest Americans faced a top marginal tax rate of 70 percent or above. Under Dwight Eisenhower, it was 91 percent. Even after all deductions and credits, the top taxes on the very rich were far higher than they’ve been since. Yet the economy grew faster during those years than it has since.” Also, so many of our neighbors who are small business owners need help. They do not need higher taxes right now. The conversation about higher taxes does not include them.

3

“Shrinking government generates more jobs.”

The facts :

• Smaller government actually translates into fewer teachers, firefighters, social workers, police officers, and other deliverers of social services.
• Indirectly, smaller government then results in fewer contracts to private companies that help to build our infrastructure.

On his blog, Reich further explains that “According to Moody’s economist Mark Zandi, a campaign advisor to John McCain, the $61 billion in spending cuts proposed by the House GOP will cost the economy 700,000 jobs.”

The fact is that when the economic players who have the big money, like many of our banks and major corporations, are unwilling to spend due to lack of confidence in our economy, the government is more important as a spender than at any other time. If the government stops spending money and lays off employees, less money gets to our communities. Just ask anyone, for example, who lives in a university town.

4

“Cutting the deficit now is more important than boosting the economy.”

The facts :

• The real long-term goal should be to reduce the percentage of debt in relationship to economic production.
• Jobs are most important right now, because without job and economic growth, the debt, in proportion to the overall economy, will only get worse.
• We need more job creation before we can bring the deficit down.

If the government were to make cutting the deficit its priority, this would lead to fewer jobs. Adding to the already high unemployment our nation is experiencing exacerbates the problem by reducing the number of tax payers. And, as noted above, when the government cuts back on the employment of government workers and private contractors, less money reaches our communities.

5

“Medicare and Medicaid are killing the budget.”

The facts :

• Medicare and Medicaid costs are rising because health care costs are rising.
• Health care costs can be curtailed by using Medicare’s bargaining power to get lower prices on drugs, medical supplies, and hospitals.
• Medicare can also bargain for a transition from fee-for-services to fee-for-health-outcomes.
• Medicare has lower administrative costs than private health insurance.
• The Medicare model, given these assets, should be opened to everyone.

So, not only does a single-payer model make more sense morally, it also makes more sense economically.

6

“Social Security is a Ponzi Scheme.”

The facts :

• Social Security is currently estimated to be solvent for the next 26 years.
• It would be solvent for the next century if we lifted the ceiling on Social Security taxes from its current income level of $106,800.
• A “Ponzi Scheme” is a plan to defraud investors; under such a plan, it is known in advance that there will be no money left to pay the investors back. This cannot be said of Social Security if it is still solvent. And it will only become insolvent if the political will to support it collapses.

7

“It’s unfair that lower-income Americans don’t pay income tax.”

The facts :

• Low-income Americans pay a much bigger proportion of their income in social security taxes, sales taxes, user fees, and tolls.

This fact is what is truly unfair, insists Reich.

These facts transcend distinctions between liberals and true conservatives—as opposed to “regressive forces” Reich has spoken of. They are facts that independently-minded voters need to know and consider. And there is nothing truly conservative in the destruction of the middle class or in huge transfers of wealth to the richest among us. Nor is there anything truly conservative about running the large deficits that accompany a dogmatic stance on taxes. It is time to learn from our mistaken adherence to such “lies.”

From the Empirical Archives: A Tale of Two Crashes Part I by Emanuel Stoakes

A Tale of Two Crashes: The Financial System and Our Planet 

Emanuel Stoakes

PHOTO: NASA/Goddard

The East Asian and global economic crises resulted in mass suffering both at home and abroad in the recent past. However, the greatest crash in human history is yet to come–something we must not forget if we care about the fate of our species. 

The United States of America, the most wealthy and powerful nation that has ever existed, was founded by a group of men who rebelled against the tyranny of imperial rule. A great number of those who had come to the “The New World,” including many of the forebears of the founding fathers, left from England and sought a place where they could freely express their religious and/or intellectual convictions far from the pressure cooker of European society with its political oppression, poverty, disease, and rigid class system.

America represented a new start. Many took the ten-week Atlantic crossing from Plymouth, Bristol, or elsewhere to forge a bold new life–and many found that. Even thousands of miles away from home, they were still subjected to manifestly unfair taxation and laws designed to subjugate the population to foreign rule. This had consequences. An epochal moment occurred on the July 4th, 1776 (as the reader will know) with the Declaration of Independence. It expressed the intention of the colonies to establish an independent sovereign nation, founded in rebellion against just such domination-by-proxy. The victory of General Washington’s Continental Army over the British in the Revolutionary War promised a chance for Americans to live according to their rights, as opposed to being subjected to the dictates of Westminster.

Jefferson Memorial
PHOTO: P. Couture

The principal author of America’s Declaration of Independence–the document that affirmed and sanctified the values of this brave new world–was Thomas Jefferson, a man revered since his day as an iconic champion of individual liberty. Nearing the end of his life he wrote a letter to his friend John Taylor, in which he reflected on the state of the nascent nation. While writing with approval about the Constitution and its virtues, he complained about “the system of banking” of the present day that he and Taylor “have both equally and ever reprobated.” Jefferson evidently took the banking system very seriously, describing it as “a blot left in all our constitutions, which if not covered, will end in their destruction.” He evinced in the final lines of the letter the frank opinion that “banking establishments are more dangerous than standing armies,” a statement now well-known. 

Jefferson’s view on banking is elucidated further in another letter held by the Library of Congress and not generally quoted, written this time to his friend Thomas Cooper. “Everything predicted by the enemies of banks, in the beginning, is now coming to pass,” he complained. After which he stated: “We are to be ruined now by the deluge of bank paper [a reference to inflation]. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs.”

Jefferson’s observations, it seems to this writer, were apt, insightful, and tragically prescient. Jefferson’s vision of the banks of his day prefigures the potent role of private money in America’s future fortunes. The self-interested agents of finance and their allies in the corporate world, modern-day “avaricious adventurers” hungry for “swindling profit”–so often enabled by our politicians, particularly those in the party that Jefferson founded–have imposed a great deal of suffering on this nation, and on large areas of the world, as we shall see. 

ART: Luming Marr*
Luming Marr has constructed a composite photograhp based on original photographs of the Lincoln statue (by Sean Hayford O'Leary), the young girl (by xenia/morguefile), and balloon flag (by US Navy Illustrator Draftsman 1st Class Moises M. Medel).

By the time of the earlier twentieth century President Woodrow Wilson would complain of “an invisible empire” of “special interests,” which he described as occupying a position of influence “above the forms of democracy,” seeking its own agenda. As the twentieth century continued in its path, the Great Depression would issue the nation an object lesson in the dangers posed by the stock market on society as a whole, resulting in powerful regulatory measures being passed into law by Congress. The Glass-Steagall Act of 1933 was an example of such legislation, which separated investment and commercial banks, in order to avoid “improper banking activity”–in particular the involvement of the latter form of banking in the stock market. However, regardless of such legislation, the power and influence of Wall Street remained enormous. The philosophies of modern “Chicago School” economists such as Milton Friedman acquired influential devotees among the West’s political leaders, leading to the gradual un-weaving of regulatory legislation from the seventies onward, a process generally agreed to have continued up until the 2008 economic crisis.

America was a country built on the back of a rebellion against the impositions of an imperial power, particularly the politically-active merchant and aristocratic classes that managed to influence London’s foreign policy to suit their own interests. Adam Smith, a contemporary of Jefferson and a man whose philosophy would come to influence US economists hugely, complained in his day of how “the merchants and manufacturers” of Britain acted as “the principal architects” of government policies, who thus ensured that their special interests were “most peculiarly attended to.” Their eye was fixed on Britain’s imperial wealth as much as it was domestic concerns.

Living in the post-crash era, it appears that the current of power in this country is concentrated in the economy and is channelled to the custodians of market forces, a state of affairs that calls one to ask whether the masters of money have too much influence, yet again, over American life. The Nobel-Prize winning economist Joseph Stiglitz observed how during the bail-out of big banks in the aftermath of the big crash in 2008: “as we pour money in, they can pour money right out” given that there exists no mechanism for the public to control how the banks spend the people’s money, a rule that would hardly apply if several hundred billion dollars had been handed-over to the same companies from the private sector.

The question of whether corporations and banks have too much power is an urgent one. At present the excesses of unregulated capitalism threaten the decent survival of many inhabitants of planet earth, our species included. This is chiefly owing to the impact of anthropogenic climate change, caused by the massive–still increasing–carbon emissions produced for centuries by Western industry and infrastructure despite decades of warnings about the results of not reigning such pollution in. Recently, developmental programs in India and China have contributed to this problem significantly; while well-funded global warming-skeptic groups in the US still attempt to influence Congress to not adopt legislation that takes the issue seriously, regardless of the interests of the wider human race.

At present, lobbying by special interests–including representatives of corporations who are both among the biggest carbon emitters and most generous donators to congressional candidates–has successfully stalled real movement to neutralize the multiple threats to our future posed by climate change. Presidents Reagan, Bush Senior, his son, and their international partners in the English-speaking world must share a great deal of the blame for this. Bush Junior in particular, who failed to ratify international treaties on carbon emissions against the wishes of most of the world, opting instead to protect US industry from the inconvenience of the Kyoto protocols.

Sadly, the prospective inheritors of Bush’s mantle differ little in their policies toward climate change. During the recent campaign for the Republican Presidential nomination, there were few who did not sincerely take the position that the issue poses little to moderate threat, or is questionable, regardless of the findings of academic research, as their allies at Fox News also prefer to do. The proposals of the incumbents go some way to deal with the problem, but hardly far enough.

To this we will return. First it may be worthwhile to revisit the past, specifically the period that led to our present state of affairs–a period that may prefigure the future devastation of our world at the hands of those who seek “swindling profits” without consideration for what they leave in their wake. 

The Greenspan False Economy 

Alan Greenspan with his wife, Andrea Mitchell
PHOTO: Financial Times/flickr

William Jefferson Clinton was elected President of the United States in 1992, having won the election that year with promises of improving life for the middle classes and other members of society he claimed were neglected by the previous administration. On making it to the White House, the new President met with Alan Greenspan, at that time the head of the Federal Reserve, who advised him that his plans for social reforms were unrealistic in the economic environment he was set to be operating in. The budget deficit, Clinton was told, was so large that if he borrowed more money to finance his planned reforms interest rates would go up dramatically–a taboo action for “neoliberal” economists like Greenspan–and damage economic growth, leaving everyone worse off. Greenspan suggested that the Clinton administration should cut government spending instead of investing tax money in social intervention and predicted that as a result of decreased interest rates the markets would soar, producing widespread and fiscally affordable benefits to all in society.

Greenspan was reportedly surprised when Clinton took his advice, which initially paid off spectacularly. The boom happened. As share prices rose and the markets ostensibly seethed with rude health, a new confidence gripped the world of finance leading to a growing belief that America’s economy had found the holy grail of modern economics–a boom without a bust. As absurd as this might sound now, the seductive belief that America was experiencing a boom that could lead to endless growth began to be adopted by respected members of America's intellectual elite.

As the 2011 BBC documentary All Watched Over By Machines of Loving Grace detailed, this belief was fueled by the development of computers that could perform complex mathematical models that, so it was believed, could assess with accuracy the risk of banks making any loan or investment. Thus, to use the terminology of the marketplace: if a risk could be predicted with confidence, investors could offset their potential losses by “hedging” against it. To hedge against something means that an investor will invest in many financial products at the same time, so that if one of the investments does not yield a return, another set of purchases (if chosen shrewdly) will be calculated to offer a return that covers any losses from the companion investment.

As a result of this, banks lent many millions to people that they never would have dreamed of lending money to in the past, believing that they could do so safely with the aid of this new technology coupled with strategic hedging. Stephen Roach, Chief Economist of Morgan Stanley throughout a substantial period of the 1990s, appearing in the aforementioned BBC documentary, described the thinking he encountered at the time: "Whether they came from Silicon Valley, from Washington, from academia, or from Wall Street there were a number of leading individuals who basically articulated a body of thought now known as 'the New Economy'; it was based on the premise of a dramatic and permanent increase in the rate of productivity growth sparked by new information technologies that would let this thing go on forever. This was manna from heaven . . . You don't have to do anything, you just press a button and "presto!" [sic] you have a brand new economy that creates jobs and prosperity."

Belief in the New Economy and early Clinton-era growth with its remarkable, ostensibly attendant low inflation and high employment is now believed to have led to overly optimistic forecasting from respected and influential sources within the banking establishment and subsequently many flawed high-level business plans. The seeds of the recent crash were being planted in the soil of America's economy, but few were paying serious attention to the warning signs.

Greenspan, however, had concerns. In 1996 he gave a speech suggesting that the American stock market may have been going through "a period of irrational exuberance," and that a potentially destructive speculative bubble was being created. The response from politicians and the business world, Roach notes, was venomous. "You would have thought the world had come to an end. Politicians attacked him from the left and the right, Main Street was upset with him, Wall Street was upset with him." Subsequently, Roach observed, "he knuckled under to political pressure" and decided to change his mind. Peer pressure, it seems, exists at every level of society.

Meanwhile, in Washington, the power of financial figures with strong ties to Wall Street had grown significantly, largely due to the political capital wrought by the economy's strength. In accord with co-thinkers in key roles at powerful institutions like the International Monetary Fund (IMF) and the World Bank, there were those who believed (echoing a Reagan-era world-view) that America had a manifestly heroic role in creating global economic prosperity and stability. The way to achieve this, according to leading "free marketeers" from those within the high finance community and to many within the IMF, was to encourage the free flow of capital through the world's economies by pressing nations to lift all restrictions on foreign investment.

The East Asian Crisis and Its Injustices

Many took their advice, and many bitterly regretted doing so. As the British journalist George Monbiot observed in 2003, going back even to the eighties “the IMF began to destabilize some of the most successful economies in the developing world” such as Thailand, South Korea, the Philippines and Indonesia. This set of countries, some of whom were recovering from the centuries-old damage of colonialism had “become rich by doing precisely what the IMF and World Bank had been telling them not to do,” by controlling capital flows in their economies, actively investing in education and supporting domestic industries, Monbiot observed.

During the Clinton era those countries were enthusiastically encouraged to liberalize their economies and, by following orders, expedited the process of opening themselves up to the flows of international capital and foreign direct investment in addition to borrowing large sums of money from the IMF.

Reflecting on this period from recent history, Stiglitz paints a picture of predatory pillaging: "The countries in East Asia had no need for additional capital, given their high savings rate, but still capital account liberalization was pushed on these countries in the late eighties and early nineties … [the IMF] pushed these policies even though there was little evidence that such policies promoted growth, and there was ample evidence that they imposed huge risks.” As a consequence of East Asian nations adopting the advice of the IMF, domestic industry suddenly had to compete with Western corporations and speculators who swooped on the new markets with gusto.

Monbiot recollects, accurately, that Thailand was for all intents and purposes economically plundered by Western activity in the currency market. Having world-leading GDP growth rates building to 9% per year from the mid-eighties up to 1995, Thailand was a major success for years– that is, until it fell victim to the machinations of aggressive currency traders. These people “made their money by a simple game” Monbiot wrote in his 2003 book The Age of Consent, which ran as follows: “You borrow a huge quantity of baht from a Thai bank, while the currency is valuable. You convert the baht into dollars. If you do so suddenly enough, and in sufficient quantity, the value of the currency collapses. Baht, as a result, are now much cheaper than they were before. You then pay off the loan with some of your dollars, and pocket the difference.”

Bangkok, Thailand skyline
PHOTO: Hendrik Dacquin

The apparent results of such a cruel speculative ruse were devastating for Thailand’s economy which went into near meltdown. Before long the Thai stock market lost 75% of its value while massive lay-offs and the liquidation of leading Thai companies followed after. A real estate crisis added to the problem, as there were masses of housing projects built for Thailand’s nouvelle riche, with suddenly no one able to afford them. Thailand’s economy was traumatized and needed help. The IMF flooded the country with loans in response. These carried “conditionalities” that were imposed upon the country, leading to cuts in programs intended to improve the lot of the ordinary citizen in key areas such as healthcare and education.

The crisis then quickly spread beyond borders. In Japan, South Korea, and south-east Asia, panic gripped the stock market. In Indonesia, a nation which had in 1997 very positive macroeconomic indicators in terms of low inflation, a healthy banking sector, a trade surplus, and large foreign exchange reserves, the economy was plunged into chaos within months. This was owing to a decision in Jakarta to increase and then abandon what is known as a “currency band” (the currency band represents the percentage of hard money tied to the value of a currency when it is floated on the foreign exchange markets), which invited massive speculative raids on the economy as in Thailand.

ILLUSTRATOR: Mark Hurwitt

The rupiah, Indonesia’s currency, plummeted. As a result, domestic companies that had borrowed in dollars had to face the higher costs of repayment caused by the rupiah’s fall, and local businesses responded by simply purchasing US currency by selling their holdings of Rupiah, further undermining the value of their national currency. Before his exit, under international pressure, after initially resisting fiercely, Indonesia’s autocratic President Suharto signed an IMF agreement in early 1998, watched over by the head of the foundation, Michel Camdessus. Accordingly, Indonesia received a huge loan to ease its economic woes. Shortly thereafter Indonesia’s currency disintegrated dramatically, losing 80% of its value and bringing the country to the edge of all-out implosion.

Initially, economists were mystified about what had happened. The truth soon became apparent: just as in Thailand, the IMF loan agreement that Suharto was induced into signing caused a brief settling of the markets–and then all of a sudden, great amounts of money left the economy as the Western investors called in their loans and fled. Later, the economist and Nobel Laureate Joseph Stiglitz would state on the matter: “The interests of the financial community dominated over other interests. By providing mega-billion dollar loans, the IMF was bailing out Western investors and leaving the taxpayers in the countries further in debt–because they had to repay the IMF.” 

Tremors were felt, though not quite as disastrously, in South Korea, the Philippines, and elsewhere, where significant economic trauma also occurred during this period. Asia’s most carefully nurtured economies were brought to the brink of implosion by governments who adopted the advice of those global institutions (like the IMF) designed to assist their development, according to the so-called “Washington Consensus”–the prevailing wisdom of the day.

There were those in East Asia who did not follow the prescriptions of Washington and the IMF, however. China, for example, resisted pressure to follow “international norms” and maintained control over its economy, and saw substantial growth continue from that period to the present day. The Chinese evidently watched and learned as Western forces massed to abuse the suddenly weakened economies of their regional neighbors. They have since ensured that they could have some leverage over North American and European economies by buying huge amounts of US securities, government bonds and debt, particularly when the Western-led “global” crash happened.

According to a congressional research service paper of last year: “As of June 2010, China was the largest holder of US securities, which totalled $1.6 trillion. China’s holdings of US Treasury securities, which are used to help finance the federal budget deficit, totalled $1.17 trillion as of June 2011, which were 25.9% of total foreign holdings.” 

With China looking set to overtake the US economy in little under five years from the time of writing, in terms of gross domestic product (the total amount of wealth produced by a nation in a year) according to IMF figures, with a future of potential Chinese superiority in the arena of trade by 2030, it seems that the future is set to see a new race between two superpowers. Having made many enemies in East Asia during the crisis years, the US is left with slim pickings for regional partners to combat the expansion of Chinese influence in the East, inadvertently aiding the prospects of a future Beijing hegemony.

As far as self-inflicted wounds go, the unintended consequences of Western and IMF interference in East Asia would soon be totally diminished by the deep wounds issuing from another crash, one that occurred approximately a decade after the Eastern free fall – a man-made disaster with its epicenter in the heart of America’s financial establishment.

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From the Empirical Archives: A Tale of Two Crashes Part 2 by Emanuel Stoakes

A Tale of Two Crashes Part II
Emanuel Stoakes 

PHOTO: Francisco Diez

Originally Published in the August 2012 Issue of Empirical

In the first part of this two-part series in the July and August 2012 issues of Empirical (available for purchase here) we revisited the beginnings of colonial American and US history and examined how founding fathers like the libertarian-leaning Thomas Jefferson critically regarded aspects of the banking sector in his day. We also looked at the remarkable construction of the so-called “New Economy” during the Clinton years, a development that led to increased lending to new markets based on the belief that risk could be accurately assessed and hedged against through new mathematical models, assisted by emerging technology. Additionally examined were the forces at play in the East Asian crash of the late nineties, and, in particular, the destabilizing influence of “Washington consensus” economics pushed by the US government and powerful global institutions like the International Monetary Fund (IMF). 

We return to the story at the turn of the century.

The Great Crash of the New Century

The East Asian crash of the late nineties devastated the lives of the poor and the burgeoning middle-classes in those Eastern nations that had, prior to the crisis, seen remarkable growth by adopting economic policies at variance with many of the prescriptions of the IMF and Washington. Roughly a decade later, the global crash of 2008, which had its epicenter in the United States, had a parallel impact on the same groups of people.

House foreclosures, evictions, job losses, prolonged unemployment, house-value slumps and negative equity hit ordinary Americans hard. 

In the case of the East Asian crash, as addressed in Part I, the damage to the economies assaulted by predatory speculators who made serious money out of currency manipulation was intended to be cushioned by IMF loans. However, according to leading economists like Nobel laureate Joseph Stiglitz, these same loans ended up effectively bailing-out Western investors, who promptly removed their money from the ailing eastern economies, leaving Asian taxpayers to foot the bill.

In the United States, as Stiglitz also observed, something not entirely dissimilar occurred. “As we pour money in” to the banks, “they can pour money right out,” he stated at the time, referring to taxpayer bail-outs of major banks and the imperiled mortgage sector. The public could not easily trace where exactly the money dispensed to these beneficiaries was going at the time, despite the fact that the taxpayers were those who salvaged the banks–arguably, the American economy as a whole. It is impossible to imagine a similar situation occurring if a private source provided $700 billion or more in an act of comparable generosity. 

Journalists, such as Matt Appuzzo from the Associated Press, tried and failed to get a meaningful response to queries about the big banks’ use of public money. That reluctance persists to this day. 

Returning briefly to the Clinton years, parts of laws dating from the Great Depression designed to protect ordinary people from the predation of Wall Street were repealed, such as those produced by the Glass-Steagall Act of 1933 (signed into law by Franklin D. Roosevelt), which was shoved into history by the Gramm-Leach-Bliley Act of 1999. Glass-Steagall separated investment (stock market) banking from depository banking. The legislation that replaced it allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate, giving them access to large amounts of formerly protected funds and a carte blanche, to some degree, to speculate with them. 

US Treasury Dept.
PHOTO: DB King

The Bush camp that followed Clinton looked even less favorably on regulatory legislation than their predecessor, doing little to protect ordinary Americans from the coming crisis, which they, instead, proceeded to expeditiously deepen. The treasury was occupied by followers of the laissez-faire school of neoliberal capitalist economics who entrusted the fate of the American economy in the hands of powerful banks and corporations, adopting the reflexive belief that “the market knows best” and that its workings inevitably lead to efficient outcomes.

Not long after the East Asian crisis and few months into the Bush presidency, a recession hit America caused by the first pin prick of reality to pierce the “New Economy.” The “dot-com bubble,” as it is known, burst in 2000: caused by a sudden fall in the value of the information technology markets that had previously been so buoyant. The bursting of the “dot-com bubble,” in conjunction with a drop in business outlays, investments, and the events of 9/11 contributed to a minor recession. 

The Enron scandal followed two weeks after 9/11, drawing back the curtain on the widespread corporate mendacity. A number of leading American firms had committed large-scale fraud in order to maintain an appearance of success to keep share values high during the boom years. Following Enron, it was exposed that many leading corporations faked evidence of profits and had hidden their debts, allegedly in collusion with respected accounting firms. 

The US economy, hit by a triple shock in such a short period, looked to be set to go through a period of crisis unprecedented for a decade. The new challenges posed by these problems called for action. Greenspan’s bold and controversial response was to drastically lower interest rates in order to encourage greater borrowing, spending, and consumption. This created a gargantuan consumer boom, without the dreaded side effect of inflation–a result that gave the impression that America’s economy was once again in the best of health.

Meanwhile, the Chinese deliberately held their exchange rate at a low level, meaning that their exports were cheap and therefore highly attractive to American corporations, leading to a huge inflow of US dollars into China and a re-stimulated American economy. The Chinese then immediately purchased American bonds, which contributed to keeping the US economy in health– and ensured greater Chinese influence over the US, allegedly an intentional strategy by the Chinese politburo.

Yet again it seemed that Greenspan’s inscrutable wizardry injected health into the economy, leading to a temporary boom. As the appearance of well-being continued, widespread lending activity akin to that seen in the period of the first Greenspan boom occurred. Again, loans were made available to members of American society who would not normally have been lent to under ordinary circumstances. Borne from this, a massive housing bubble was being constructed involving a new frontier in the housing loan market–the “subprime” mortgage.

Protesting the close ties of the Treasury Department and Wall Street
PHOTO: takomabibelot

The Housing Bubble

According to the US Department of Housing and Urban Development, “sub-prime” lending occurs in a market intended “for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk.” Roughly translated, this means that people who have a reasonable chance of not being able to repay are given loans anyway, with big interest charges to compensate for the risk to the lender–the obvious effect being that the risk of default is great, and the risk of further indebtedness for a consumer of this financial product is increased. The ethics of this financial product were as questionable as loans to “sub-prime” borrowers were imprudent.

As recent history reveals, sub-prime mortgages turned out to be a very bad deal for both the lenders and their customers. The now-infamous Lehman Brothers invested heavily in the subprime market by “bankrolling lenders across the country that were making convoluted loans to questionable borrowers” as well as producing their own subprime loan offers, Time magazine recalls. Lehman “took all those loans, whipped them into bonds and passed on to investors billions of dollars of what is now toxic debt,” the Time piece continues. When the debt bubble broke, the American economy took a hit. Operating in this market helped Lehman CEO Dick Fuld earn around half a billion dollars for himself in the process, while effectively steering the company he managed to ruin. 

The fall of Lehman coincided with a decline in housing prices from a historical peak in 2006 to ever more worrying levels in 2007. As a result of the permissive lending environment of the Clinton-Bush years, the ratio of American debt to disposable personal income reached a high of 127% in 2007, largely owing to the opening up of the mortgage market. A slump in housing values meant that many Americans who held subprime mortgages with adjustable rates saw their repayment costs increase just as times were getting harder for everyone. Mortgage delinquencies became common, and financial instruments such as securities backed by mortgages, which constituted a big market, increasingly lost their value.

The housing slump was also helped by Greenspan’s decision to lower interest rates after the “dot-com crash.” He would later admit that the housing bubble was “fundamentally engendered by the decline in real long-term interest rates,” which he had intentionally kept low in order to stimulate the economy, knowing that they would have to be raised again eventually–with unpredictable results. In the meantime money on credit became more available to borrowers who would eventually simply default on their payments as times got tough. All of a sudden a lot of money that was owed and which was backed-up financial instruments owned by Wall Street could not be accessed, with a sweeping domino effect throughout the economy. 

PHOTO: Jeffery Turner

The consequences for the average American, as already established, were horrendous. Moreover, the cost of the economic crisis was borne primarily by the taxpayer–just as much of the benefits of the boom years had flowed to private companies, the costs of rescuing many of the biggest offenders got paid for by ordinary people.

The manifest injustice of the situation can be adequately demonstrated by looking at figures between 2007 and 2009: the top 1% who owned 34.6% of the nation's wealth in 2007 increased their proportional share to over 37.1% by 2009, while nearly two-thirds of Americans saw a decline in wealth. 

The dream of the self-regulating market was assaulted by reality in the form of the crash of 2008. The notion of trickle-down wealth was no less bruised. 

There are those, however, who contend that many of the ideological truisms of modern economic thinking are myths, particularly in the “Gordon Gekko” age of no-holds barred wealth-seeking. Respected economists, such as the Nobel laureate and New York Times contributor Paul Krugman, have drawn attention to why the “greed is good” culture that has dominated Wall Street and influenced politics so profoundly since the 1980s was no less as miraculous or socially salutary as Greenspan’s 90s boom, despite common assumptions. 

Considering “how trends changed after 1980 or so, when the underlying rules of American business (and politics) shifted” this 23rd May in the New York Times, Krugman noted that “productivity growth has actually been slower” since that period. Additionally, he observed that, coupled with this, “income distribution became radically more unequal,” and that the notion that the US “began selling competitively on world markets instead of running big trade deficits” is also demonstrably false. 

On the Threat of Environmental Catastrophe

The influence of private power over human fate is as strong as it has ever been and looks set to have an impact generally on much of life on earth if the reckless and single-minded pursuit of profit so often associated with modern capitalism is not reigned in. The gravity of the problem is almost certainly unrivaled by any threat to the species in recent history since the Second World War or the Cuban missile crisis.

Yet the danger is not posed by the familiar boogeyman of corporate greed per se. The threat is represented by the effects of significant global climate change, presently on course to occur barring some miracle. 

An authoritative government report released last year indicated that in only the next decade New York would be under threat from temporary or partial submergence by rising sea levels and increased storm activity similar to Hurricane Irene, causing enormous damage with a massive economic price tag attached to the mess. Yet this scenario, entirely plausible and very worrying, is only a taste of what looks set to be a part of our future.

In November last year the International Energy Agency released a report described as the “most thorough analysis yet of world energy infrastructure,” which indicated that if global fossil-fuel-producing infrastructure (i.e. coal and power stations) is not widely replaced or significantly altered in the next five years, then it would “become impossible to hold global warming to safe levels, and the last chance of combating runaway climate change will be lost for ever.” 

Additionally, around the same time as the IEA report was published last year, the US Department of Energy reported that the “biggest jump” in carbon dioxide (a major cause of climate change) outputs ever measured occurred in 2010, indicating that the trajectory of risk from the effects of global environmental cataclysm is rising steeply. 

World-leading academics like John Reilly, a senior climate change researcher at Massachusetts Institute of Technology (MIT), have warned that some of the most widely-accepted estimates of the effects of global warming have been far too conservative. Reilly’s team at MIT forecast carbon emissions scenarios, their likelihood, and what the most likely outcomes are in the event they occur. What they discovered recently does not bode well. According to an Associated Press report, a “[UN-organised International Panel on Climate Change, or IPCC, report’s] worst-case scenario was only about in the middle of what MIT calculated are likely scenarios.” It is interesting to note that, to many climate skeptics, the IPCC report was widely derided as being “too alarmist.”

The IPCC estimates foresaw a rise in global temperature of somewhere between 4 and 11 degrees Fahrenheit (2.4-6.4 Celsius), with the most likely outcome being a rise of 7.5 Fahrenheit (4 degrees Celsius). To put this in perspective, the generally-agreed baseline for “safety” in terms of climate change would see an increase in global temperatures by only 2 degrees, in itself a global climate shift that would still have profound consequences. 

However, topping the safety line things begin to look really scary. At 3 degrees alone the consequences for humanity are close to nightmarish. 

According to British newspaper The Guardian’s science correspondent Alok Jha, who compiled the predictions of researcher Mark Lynas, the World Bank’s “Stern report,” and Britain’s Met Office, at 3 degrees: “Billions of people are forced to move from their traditional agricultural lands, in search of scarcer food and water. Around 30-50% less water is available in Africa and around the Mediterranean.” At 4 degrees “Italy, Spain, Greece and Turkey become deserts and mid-Europe reaches desert temperatures of almost 50 degrees Celsius in summer. Southern England's summer climate could resemble that of modern southern Morocco.” 

PHOTO: Hamed Saber

At 5 degrees and above, the picture becomes apocalyptic. The results would see “global average temperatures … hotter than for fifty [million] years.” Additionally, Jha said that “most of the tropics, sub-tropics and even lower mid-latitudes are too hot to be inhabitable. The sea level rise is now sufficiently rapid that coastal cities across the world are largely abandoned,” with a risk that at 6 degrees and over, “there would be a danger of "runaway warming," perhaps spurred by release of oceanic methane hydrates,” risking that the “human population would be drastically reduced.” 

That’s quite some bad news. However, at present a 5-6 degree rise is not guaranteed, nor yet confidently forecast. There’s a lot of work to be done however to prevent or mitigate the worst effects of probable temperature rises above 2, 3 or even 4 degrees Celsius. God forbid anything higher.

Yet despite the urgent need for action on this issue, there are those who would try to convince the average citizen that climate change, a problem of planetary significance that Western industry has had an unrivalled role in creating, is merely the product of “liberal propaganda”–a kind of modern-day myth. 

Oil companies like Exxon-Mobil are still largely the biggest in the world, and these groups have been proven to have funded climate change skeptics. 

As the “carbon bubble” is being readied for bursting by rising emissions, a drop in media coverage of the effects of climate change has been measured by groups monitoring the news, helping to efface the issue from the public mind in an election year, where the aftermath of the economy still rides high among concerns for most people. 

Yet regardless of the economic woes that still persist for many people, through little fault of their own, something has to shift in the world if it is to be rescued from the threat of climate change.

A Stark Choice

If this is to be done, a stark choice between submitting to the imperatives of the economy’s endless need for profit or protecting the future of the planet may be required of us. As environmentalist Bill McKibben articulated recently: “If we spew 565 gigatons more carbon into the atmosphere, we’ll quite possibly go right past that reddest of red lines. But the oil companies, private and state-owned, have current reserves on the books equivalent to 2,795 gigatons–five times more than we can ever safely burn. It has to stay in the ground. Put another way, in ecological terms it would be extremely prudent to write off $20 trillion worth of those reserves. In economic terms, of course, it would be a disaster, first and foremost for shareholders and executives of companies like ExxonMobil … If you run an oil company, this sort of write-off is the disastrous future staring you in the face as soon as climate change is taken as seriously as it should be, and that’s far scarier than drought and flood. It’s why you’ll do anything–including fund an endless campaigns of lies–to avoid coming to terms with its reality.”

“Growth for its own sake,” so the saying goes, “is the ideology of the cancer cell.” Regardless of the cliché of this thoroughly-abused slogan, its message is apt to our present crisis: the interminable desire for gain required by our present way of life may yet so damage the organism from which it derives sustenance (our planet) that it sabotages its own existence. This negative-sum game is given license to continue apace because it is inexpedient for those with real power to challenge it.

Endless clamoring for growth has meant that along with development, massive pollution has shadowed the steps of Western prosperity–yet the effects of this on the climate, now widely accepted as fact, are an “externality” not incorporated into market calculations. Climate change thus remains a total irrelevance to the closed system of global capitalism, regardless of its long-term impacts on the future of the sine qua non base that supports the market itself: human beings and their labor, the environment and its resources. 

For big business, even when there are devastating economic crashes, somebody always benefits. Goldman Sachs famously reaped massive rewards by betting on the housing crash that they themselves contributed to, helping to consolidate their leading position in the banking world. However shocking this may seem, however such acts stink of grotesque immorality–they are merely consistent with the demands of the system in which they operate, and the rigid logic of the market. 

It remains for politicians to act on this issue. But they are not doing enough.

As a result of runaway climate change, losses in the future may be so broadly and profoundly felt, however, that future generations can hardly be expected to accept with equanimity what history may teach them about how the miserable state of the world they have inherited came to be. Explaining to our grandchildren that the Earth was left to go to hell because it was deemed too much for our politicians to reign in corporate and industrial irresponsibility will not be easy, but it won’t stop it from being true–if we do nothing.

It is time to forget what is convenient or ideologically appealing, and address what is real–for our children’s sake.

There is still time, although barely, to act to influence our politicians to deal with this most serious of global issues–that is, if we care about something so petty and meaningless as the future of life on Earth.

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