How financial devils came to rule the universe


Red devil in a business suit holds up a flaming globeReligious authorities do not necessarily spend a lot of time pondering the nature of global financial systems, but Pope Francis' recent comment that 'money has to serve, not to rule' suggests it can be useful when they do. For at least a decade, the failure to make money something that serves is exactly what has gone wrong in world finance — and to an extraordinary degree.

The tension is hardly new, indeed it is as old as the vice of usury. Allowing bankers to gain too much power has been a recurrent problem for centuries. In the 1930s, Franklin D. Roosevelt used the term 'banksters' to describe a rapacious finance sector that was exploiting the misery of others for profit.

In 1861 Abraham Lincoln created the 'greenback', dollars that were printed in green by Congress which had no interest rate and had not been borrowed from banks. That way Lincoln was able to get around paying money lenders interest rates of between 24 per cent and 36 per cent to finance his war effort.

'The people can and will be furnished with a currency as safe as their own government,' announced Lincoln. 'Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.' Needless to say, these interest free greenbacks did not last long — and neither did Lincoln.

This time, however, the problem is different. Money is rules, rules about value and obligation.

Normally, financiers depend heavily on the enforcement of those rules by governments, even as they exploit them for their own use. Thus Shakespeare's character Shylock praises Portia when she gives judgement in his favour as 'noble' and 'worthy' when she says the law must be carried out and he can have his pound of flesh (he is only defeated by a legal technicality, not by the law being flouted).

Governments change the rules of money from time to time, often in order to stop financiers enjoying mastery over everyone else. But over the last three decades, a period euphemistically described as financial deregulation, something very different has been happening.

If money is rules, then how is it possible to deregulate them? It isn't. So what was financial deregulation? It was governments allowing financiers to make up their own rules, in effect ceding their responsibility to govern. This is not the usual cycle of boom and bust, nor is it a customary battle over who is servant and who is master.

When the debauch with rule making (financial deregulation) all went wrong in 2007 the financiers realised they were as dependent as ever on governments. Predictably they turned to them to bail them out (to the tune of $6 trillion in the United States according to some estimates). The financial system is sputtering back into life.

But there seems to be little appreciation of how deep the problems are. The basic problem, allowing financiers to make up their own rules, has not been addressed.

Permitted to become the rule makers, rather than just people who know how to exploit the rules created by governments, financiers have manoeuvred themselves into a position of systemic mastery — this time they really have become the 'masters of the universe'. It is a new form of hyper usury.

These new rules come in many forms, usually accompanied by heavy computerisation. They go under the title of derivatives (transactions derived from more conventional forms of money like stocks, bonds, bank debt, currencies, physical gold). Derivatives amount to more than $US700 trillion, according to the Bank for International Settlements, more than ten times global GDP and more than twice all the world's capital stock.

These large sums allow financiers to be masters over governments. Dr Robert Johnson, executive director of the Institute for New Economic Thinking, recently commented that the attorney general of the US, Eric Holder, complained that he cannot prosecute crimes in the largest banks because it might undermine confidence. That is why not one prosecution has been brought against bankers since the global financial crisis.

The derivatives market is 97 per cent dominated by six banks, which make about $35 billion a year from the trade. Analysts estimate that if you properly structured derivatives — brought the rule making under at least a semblance of control by putting them on exchanges, making them more transparent, properly capitalising exchanges — the banks would lose $7 billion a year.

A financial bill gets through Congress about every five years, calculates Johnson, so the profit at risk if bankers are not allowed complete freedom to make up their own rules is about $35 billion.

'As it turns out,' said Johnson, 'the banking lobbies spend about $600 million which overwhelms American politics. It is the dominant force in American politics given the importance of money and how our society works. For $600 million these guys can protect $35 billion of profit. Fabulous risk return for them. Terrible for society.'

When financiers are allowed to make up their own rules, the result will inevitably be a crisis or collapse as they try to game each other. The global financial crisis was an inevitability, and the subsequent partial recovery has been about the best possible outcome.

Pope Francis argued for the 'need for financial reform along ethical lines that would produce in its turn an economic reform to benefit everyone'. This seems unlikely when financiers are able to make up their own rules. The hubris that accompanies such mastery tends to destroy perspective, let alone ethics.

The Columbia university economist Jeffrey Sachs described the situation this way in a recent talk to bankers at the Philadelphia Federal Reserve: 'I regard the moral environment as pathological. And I am talking about the human interactions ... I've not seen anything like this, not felt it so palpably.' 

David James headshotDavid James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University.

Image from Shutterstock

Topic tags: David James, economics, GFC, Dr Robert Johnson, derivatives, Jeffrey Sachs



submit a comment

Existing comments

Austrian economists want to blast this corrupt network that David James describes by sundering the politically-engineered link between the state and money. This would mean an end to the inherently dodgy system of fractional reserve banking we've suffered under for centuries, and a return to objective standards of money - gold; gold & silver; gold, silver and xyz - whatever the market would accept. This would refound the banking system on a trustworthy basis that it had at its inception back in the 16th and 17th century. Plus it would instantly eradicate any political clout the corrupt banksters have with the state. Unfortunately for the neo-Keynesians and the Friedmanite monetarists, it would also fatally cramp their style. And yet they're the ones still pulling the levers. Isn't it a pity that the one solution that would meet Pope Francis' criteria is the one which has an ice-cream's chance in hell of getting up?

HH | 05 June 2013  

There is a saying:- "America has many religions, but only one God: the American Dollar." It seems Australia is trying to emulate America.

Robert Liddy | 05 June 2013  

Well done David James. With respect, however, it should be said that the rule of money is only a reflection of the prevailing economic and social philosophy of 'economism,'..managerial economism" to be more precise. The encyclical "laborem exercens' used the term to assert the primacy of man in the production process..and that Man is the subject of work..not the economy. This is the first age in the history of mankind that sees humans working for incorporeal things.,.,corporations...Why wont our clergy come out with support for humans against this new oppression. Please God Francis 1 may lead a charge against such an unChristian social and economic regime.

jim macken | 05 June 2013  

Money makes money and the super-rich usually become even richer - and find ways to avoid appropriate taxation. Worse still, they can and do control or heavily influence much of the news media and the attitudes of readers. What can be done?

Bob Corcoran | 05 June 2013  

I'm afraid I don't understand economics. It seems to me that if prices go up, that means the value of money has gone down, and since the economy is based on money, that means that the economy is doing badly. But prices always go up, so the economy is a permanent failure. We need a new system that works.

Gavan | 05 June 2013  

Thanks David for an excellent article. Since governments are now controlled by corporations with symbiotic relations with banks and in Oz by the Murdoch media the unelected rule the elected and the electors. So we are oppressed by our own people. Isn't this the definition of civil war? In terms of the suffering caused to large numbers of people bankers are guilty of crimes against humanity. Only by this kind of article will awareness develop. Unfortunately there are still sufficient morsels of bread and plenty of circuses to maintain the torpor and there are now few rallying points and no solidarity. Try telling this to any Australian politician. Thanks again David for the best thing I have read in ages.

Michael D. Breen | 05 June 2013  

Gavan, I don't claim to understand economics very well, either, but what you've said can't be true in a specific sense: prices CAN go up, but that MAY not mean the economy is doing badly. So, imagine the Angel Gabriel doubled overnight everyone's monetary assets. What would happen? Well, after a while, prices would double. But this wouldn't mean that the economy was faltering. Eventually, at the end of the doubling, everyone's purchasing power would be the same as before. Moreover, if we compare, roughly, hours worked/product ratio since, say 1800, we'd see that our standard of living is exponentially better than it was. IE, on average, we have to work a fraction of an hour to earn the money to purchase a shirt compared to the hours we had to work in 1800. To say nothing of computers and their equivalents. Or travel. But you're right about rising prices. Ideally, as the economy develops, prices should be falling everywhere - just like they are in certain unregulated sectors like computing, cameras, etc. The reason they are not everywhere is because of hundreds of government regulations (eg. land zoning/releases) plus, most importantly, ongoing government increases in the money supply.

Name | 06 June 2013  


Subscribe for more stories like this.

Free sign-up