Nationalization in a Time of Monopoly

The witchdoctors are rattling their bones and spitting into their potions. Frogs’ legs, squawks one. Eye of newt, cries another.

The right blames Fanny and Freddy for setting off the financial tsunami. Naomi Klein says it’s the Chicago boys and capitalism.

The left denounces private sector greed. The right, public sector do-gooding.

Overpaid CEOs, overdrawn borrowers, underestimated risk. There’s enough blame to go around.

The only problem is that a half-baked understanding of a problem leads to half-baked remedies. And half-baked remedies are worse than no remedy at all.

Nationalization is the cry now. Nobel winner Paul Krugman at the New York Times says it’s as American as apple pie. I daresay that’s the first time Krugman ever appealed to tradition to sell anything.

Even Fed Chairman Ben Bernanke floated it recently, and then backed off, when the market tanked in response. But by now we know that our rulers speak not just from both sides of their mouth, but out of both mouths of their two-faced tyranny…and from its derrire too. We can confidently predict that in the days ahead Republicans and Democrats, private and public sectors will join the breadline for nationalization

Now, in a different country, in a different context, nationalization might make sense. But trotting out Sweden’s history as a model for the U.S. is disingenuous. Sweden is about one-twentieth the size of the US and it has around one-thirtieth of the population. It’s not an empire with a vast portion of its economy dependent on its defense department. And it’s also one of the least corrupt and peaceable countries in the world, by standard measures.

Knowing exactly how corrupt this system is, how deceptive, and how out of control, we would be fools to place our faith in nationalization in America. Or in any other panacea pushed by the state. None of them stands any chance of being anything more than a change of label, a PR facelift. A jackass in a wig and stilettos can kick all it wants, it won’t turn into a chorus girl.

Only the Austrians so far seem to grasp this and only the Austrians seem to understand the underlying problem — which is money. Money backed by nothing tends toward nothing. But there is more to it. The cheapening of money, its lack of intrinsic worth is only an effect, not a cause. The cause lies deeper — in the unconstrained power of the government to print money. The source of corruption is this absolute power.

It’s because the US mint alone can print legal money that money has lost its link to real value and become rapidly cheapening paper. The monopoly of money, you could say, has given us toy dollars, monopoly money.

That’s the first tier of damage. There’s a second.

What does cheap money do to the economy? Cheap money makes borrowing attractive, because when the borrower pays back, he pays back with less than he borrowed. How? Because inflation has lifted prices in the interim, and because in the interim, the Fed has intervened to keep the price of money (the interest rate) lower than its market worth.

This little extra boost makes saving unattractive to working folk and induces them to spend. It makes it worthwhile for gamblers to gamble more, and for the prudent to turn into gamblers too. Cheap money transforms the economic calculation of genuine investment activity into a conman’s game of scheming and swindling. It encourages beggar-thy-neighbor speculation, with no roots in productive activity.

Cheap money also makes it worthwhile for businesses to borrow massively and expand. The bigger the business, the bigger a payoff it gets from cheap borrowing. The bigger the business, the more it can buy up (or buy off) its competition. Cheap money means monopolies. And monopolies are the opposite of a competitive free market.

Which is why, in the few decades since Nixon delinked paper money from the gold standard, every economic activity in America has become dominated by giant conglomerates. True, the gigantism of modern business has many other roots. But there isn’t a doubt that cheap money — low interest rates — has been a major impetus behind the frenzy of merger and acquisition activity since the 1980s. Lowering interest rates makes money cheap compared to other factors of production. The country becomes increasingly fixated on making money off money (through debt, payments on debt, insurance on debt default, leverage of debt, and arbitrage between debts). Cheap money was behind Michael Milken’s junk bond innovations at Drexel Burnham Lambert in the ’70s and it was behind the derivatives mania that just went bust.

The rot in this economy has nothing to do with free market enterprise. It’s the sour dregs of monopoly finance. It’s corrupt corporatism.

Naturally, the businesses whose business is money — the banks — have become giants. Simultaneously, and predictably, other businesses — like insurance companies — have turned into banks, bloating the financial sector even more and displacing and perverting productive investment.

Monopoly money gave us monopoly banking. And the biggest of the banks used their power to hustle the regulators and scuttle the regulations. They cannibalized other banks that lacked their connections, stirred up mass panic in the markets, and then boldly stepped out from behind the curtain and seized power right in our faces. Now they consolidate power at break-neck pace behind the rhetoric of change.

Under Bush, they used the cover of right-wing sympathy for businessmen to grab the levers of power. Under Obama, they use the cover of left-wing sympathy for workers to create the programs to deploy that power.

Law-abiding socialism is better than crony capitalism and it’s infinitely better than a kleptocracy. But only a political simpleton would believe that a gigantic and corrupt empire of this sort is going to turn into an earnest cooperative of social democrats simply because the New York Times says so.

Ask yourself: With the government firmly in the pockets of giant businesses, whom would we trust to oversee a central bank?

No one.

And what would prevent it from becoming anything more than an instrument of private interest, with the power and the purse of the public added?


Supporting nationalization Robert Teitelman at The Deal writes,

"Finally, the People can get control of the powerful forces of finance that have, in the past, fed only private moneyed interests."

("The Many Strands of the Nationalization Argument," The Deal, February 3, 2009).

This is gobbledygook.

Which "people"?

Every class and group has a different interest and none of them is in any position to take direct control of anything, least of all policies being hatched in half-light and shrouded language behind the scenes.

Lobbyists and activists have appointed themselves spokesmen for some (poor) people, whose approval they’re busy buying, and they’re enacting the policies of some other (rich) people who are financing them. The rest of it is smoke and mirrors meant to confuse anyone who might object to the robbery.

Buy this book.

The rest of the "people" do not count. Listen to the language being used. Have you heard anyone suggesting returning money to savers (American and foreign) who were cheated out of the market return on their money for decades? Or to creditors (American and foreign) who’ve been stiffed by depreciating currencies for decades? None. Is anyone offering quantitative easing to people who pay their bills but have to endure higher rates and tougher requirements because of other people’s sins? Is anyone talking about workers who retrained themselves at their own expense? Is anyone bailing out healthy businesses whose stocks have been hammered mercilessly along with the toxic financial sector? Or supporting the pensioners whose Triple-A bonds turned out to be junk?

The "forces of finance" are going to serve the people instead of "private moneyed interests"?

Then what happened to the trillions created during the bubble years by the "forces of finance"? Even if all of it was froth, who skimmed the froth? What happened to the tax revenues on it? Or were there no taxes because the money was siphoned off? We know that ex-Nasdaq chief and high-society swindler Bernie Madoff took part in Primex, a digital auction platform intended to rival the New York exchange, and we know that he was joined by Goldman Sachs, Citigroup, Morgan Stanley, and Merrill Lynch. Primex was intended to legitimate "internalization" — which is the matching of customers’ buy-and-sell orders in house, rather than on the public exchange. It would have made a perfect cover for any of the participants who wanted to hide profits. Is that why it was conveniently set up in 1998 at the height of the stock market bubble and why it quietly disappeared in 2004, just before the shoes started dropping in advance of the current market crash?

Buy this book.

The "forces of finance" on the side of "the people?

You might as well wait for Obi-Wan Kenobi.

The plain fact is that it’s only private moneyed interests that are getting the biggest helpings of government money. Especially private interests that have friends in high places, like Goldman Sachs and Citigroup.

Treasury Secretary Tim Geithner is the protégé of Robert Rubin, former chief of Citigroup and former US Treasury Secretary. Geithner’s close advisors include Goldman Sachs alum Gerald Corrigan and John Thain (ex-chief of the New York Stock Exchange), as well as Alan Greenspan (the leading architect of the policy of cheap money and derivatives) and Larry Summers (who is the head of Obama’s National Economic Council, as well as a former chief of the World Bank and former Treasury Secretary).

Both Summers and Rubin were deeply involved in the Clinton administration’s bail-out of Mexico and Russia during their currency crises. In practice, those were bail-outs of the bond-holders, among them, Goldman Sachs. In addition, Summers has taken Citigroup perks (including free rides on its corporate jet) and lobbied for the removal of caps on executive pay at firms which received stimulus money (among them, Citi). And he also defends the impeccable economic logic of dumping toxic wastes in low-wage under-populated regions like Africa.

That doesn’t sound like the record of someone likely to hand over power to the powerless. But it’s what you expect from finance capital in the seat of power.

First, it creates debt everywhere until the capital base of the economy is destroyed and production is in tatters. Banks become bankrupt, except for those that have government connections and can consolidate. The monopolies have nothing to restrain their anti-market behavior and push their own agendas in concert with the state. With no limit to cheap credit, the money supply swells. Workers can no longer keep up with inflation. The lopsided development of the state sector crushes savings and production in the remainder of the economy. Jobs dwindle.

To supplement them, the corporate-state creates make-work programs on the domestic front. When bad times and discontent persist, it looks abroad.

Then comes war.

That is where nationalization in a time of monopoly will take us.