Posts Tagged ‘finance’

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I know all about how corrupt a city can by. I live in Chicago, the “Capital of Corruption.”

And I hear all the time about all those other corrupt cities, most of them located in countries in Latin America, Africa, and Asia, which often fall low in the corruption perceptions indices like the one produced by Transparency International.

But for all the talk about transparency and the need to tackle corruption at the 2016 Anti-Corruption Summit in London, the host country itself may be the most corrupt in the world.

As Joel Benjamin [ht: ja] explains, the indices produced and disseminated by groups like Transparency International “only measure perceived corruption based upon the abuse of public office for private gain, i.e. the payment of bribes.” What they don’t account for is the fact that “While nepotism and subservience to finance capital is rife in Britain and its overseas dependencies, it is not illegal.”

At least Chicago’s corruption is transparent. Donate to the mayor’s campaign chest and you get a city contract or assistance with a development project. In the city of London (and other such financial centers in Britain, the United States, and Western Europe), corruption is based on money laundering and financial secrecy.

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And if we measure those forms of corruption, then (as with the Financial Secrecy Index developed by the Tax Justice Network) the tables (so to speak) are turned: Switzerland ends up at the top, the United States rises to number 3, and the United Kingdom rounds out the top 15.

If anything, the bribing of public officials in Chicago, Lagos, Bogotá, and Bangalore is quite transparent—and often involves the siphoning-off of some of the surplus from the initial appropriators to their friends in high places in order to keep doing business. The corruption in Geneva, London, and New York is something quite different and even more pernicious: it involves the laundering of the surplus captured from the entire world so that the economic and political elites who capture it get to keep it and accumulate even more wealth, for themselves and their friends in high places.

All of it legal—and fundamentally corrupt.

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Lynn Parramore [ht: ja], in reviewing Rana Foroohar’s forthcoming book, Makers and Takers: The Rise of American Finance and the Fall of American Business, presents a memorable image (straight out of Dr. Terror’s House of Horrors):

Foroohar’s book explains how our financial system stopped funding new ideas and projects and started extracting precious resources from Main Street. Her writing leaves a vivid impression that once the financial wizards get their way, nobody is safe, from the young college grad next door drowning in debt owed to predatory lenders to the child halfway around the world whose dinner fell victim to commodities speculation.

As I turned the pages, I began to imagine Big Finance as a giant exotic vine from some florid disaster movie that has grown out of control, creeping onto the roofs of our houses, reaching into the food on our plates, tightening its hold on our wallets—even taking over our minds. I’m embarrassed to say how many times I hear phrases like “human capital” and “return on investment” issuing from my own lips: finance-originated concepts used to describe relationships and activities that have little to do with spreadsheets.

Still, it’s not quite as dramatic as Matt Taibbi’s reference to Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

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Cartoon of the day

Posted: 21 March 2016 in Uncategorized
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Special mention

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Reuters

The members of the political establishment in the United States seem surprised by the astounding success of Bernie Sanders’s campaign. Reuters even has the democratic socialist now leading by more than 6 percentage points.

As it turns out, the political establishment in the United Kingdom has had a similar problem: they don’t understand how Jeremy Corbyn has come to lead the Labor Party.

Simon Wren-Lewis argues that the Left’s success on both sides of the Atlantic really shouldn’t be a surprise. That’s because of the growing importance of the financial sector, which has fueled obscene levels of inequality and created the conditions for the Second Great Depression.

The establishment on the centre left often seems too timid or ignorant to talk about the power of the financial sector, and is therefore unwilling to challenge it. Many ordinary people who support the left in the UK and US do have some understanding of what has gone on. It should therefore not be surprising that they have moved away from established leaders towards those – like Corbyn and Sanders – who are willing to talk more openly about the power of the financial sector and inequality.

Why were politicians and the media so surprised by this success? I think it tells us how insular the Westminster and Washington bubbles really are. Political commentators talk to politicians who talk to political commentators. It tells us how embedded the influence of the City and Wall Street is. The media relies on economists from the financial sector, and so tends to see the economy from their perspective.

The blind spot is mostly to the left, because we have the Daily Mail and Fox News. As a result, it came as a complete surprise that a crisis caused by the financial sector that left that sector unscathed but instead led to a diminished role for the state, might make many people rather angry.

Surprised? Don’t be.

 

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William D. Cohan’s broadside [ht: ja] against Bernie Sanders hinges on a simple, but fundamentally wrong, argument: we all benefit from the risks taken by Wall Street.

Simply put, Wall Street’s purpose is to re-allocate capital from people who have it (savers) to those who want it (borrowers) and then use it to grow businesses that employ billions of people around the globe and help give them a modicum of wealth that they did not have before. One man’s speculation, in other words, is another man’s risk-taking. Without people willing to take those risks, and having the chance to reap their reward, there wouldn’t be an Apple, a Google, a Facebook, or countless other large corporations. The billions of people around the world who are employed by thriving companies would lose their jobs.

Clearly, Cohan doesn’t understand Wall Street (or, for that matter, the rest of the financial sector). It doesn’t collect capital from one group of savers and allocate it to another group of borrowers, which then creates jobs. Rather, it recycles the surplus created by people who work in order to allow those who appropriate the surplus to collect even more. In other words, Wall Street manages the surplus on behalf of a small group of wealthy individuals and large corporations. And it grows its own profits not as a reward for taking risks but by taking a cut of each and every financial transaction.

As we know, Wall Street does in fact take risks, as it did in the lead-up to the crash of 2007-08. But the risks were borne not by Wall Street, but by the rest of us—in the form of massive layoffs and foreclosures.

What about the other part of the argument, that Wall Street helps businesses grow?

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As it turns out, Matthew C. Klein addressed this issue just about a year ago. His argument, in short, is that productivity growth in rich countries started slowing down around the same time that the financial sector’s share of economic activity started rising rapidly.

First, the high salaries commanded in the financial sector — much of which can be attributed to too-big-to-fail subsidies and other forms of rent extraction — make it harder for genuinely innovative firms to hire researchers and invest in new technologies.

Second, the growth of the financial sector has been concentrated in mortgage lending, which means that more lending usually just leads to more building. That’s a problem for aggregate productivity, since the construction industry is one of the few that has consistently gotten less productive over time.

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In other words, as illustrated in the chart above, the growth rate in productivity was systematically faster when the finance sector was relatively smaller (from 1948 to 1975), and then when the finance sector got bigger, productivity growth got smaller (from 1976 to 2014).

The ultimate irony is that Cohan actually makes Sanders’s case for breaking up Too Big to Fail banks and reigning in Wall Street:

Sanders is right that Wall Street still needs reform. The Dodd-Frank regulations fail to measure up; Wall Street lobbyists and $1000-an-hour attorneys work away each day to gut the meager reforms signed into law by President Barack Obama in July 2010. It is also unconscionable that Wall Street’s compensation system continues to reward bankers, traders, and executives to take big risks with other people’s money in hopes of getting big year-end bonuses. Thanks to this system, which has been prevalent since the 1970s, when Wall Street transformed itself from a bunch of undercapitalized private partnerships (where those partners had serious capital at risk every day) to a group of behemoth public companies (where the risk is borne by creditors and shareholders while the rewards go to the employees), Wall Street has become ground zero for one financial crisis after another.

Neither Sanders nor I could have said it better.