Shadow banking and austerity
In our last blog, we detailed the enormous flows of cash circulating through the shadow banking system, and how that knowledge should change our understanding of austerity and public debt. With $32 trillion in idle offshore tax havens, $67 trillion in the global shadow banking system, and $600 trillion in out-standing derivatives contracts, one wonders why the political choices faced by one nation after another involve the premise of austerity in the first place.
A relatively strong push by central governments to seize even a small amount of unregulated capital and insurance commitments would deliver huge revenue returns: 1% of $67 trillion would close the US budget gap without any more talk of a fiscal cliff or higher personal income taxes. 10% would pay off all student and individual state debt in the United States, and leave enough left over to cut the national deficit by 20%. Since so much of these “dark pools” of capital in the shadow banking grow from the proximity of certain firms to central banks, where they can borrow money at almost no cost, it would seem seizing the powers of the central banks might also be an alternative to austerity.
In an age of austerity, it would seem now might be an ideal time to end the famous “independence” of central bank monetary policy and begin to promote a new kind of stimulus – one where cheap capital doesn’t go into the black hole of shadow banking, but instead, first, serves some useful social purpose. When seen this way, it’s easier to understand why austerity is a political choice. After all, as we’ve seen, there is no shortage of capital in the global finance system.
Instead, there exists a shared political consensus in the minds of both representative governments and autocratic governments that the purpose of government is to manage economic growth for accumulation, not for the global commons. There is already enough money in the shadow banking system, for example, to pay reparations to the global south for bearing the brunt of climate change catastrophes. There’s enough to pay states to cease cutting down the rainforest. And there’s enough money to pay coal plants to stop burning coal. These “investments” would be long-term, however, and wouldn’t necessarily show short-term profit growth. But it would mean an immediate alteration in the political conversations that define the post-2008 crisis era.
Swimming in the dark pools
We have so much money in the system – too much, in the minds of many – that there’s a reasonable case to be made for revolutionizing the power of governments to seize and tax the “dark pools” of accumulation we call shadow banking. The question isn’t so much whether governments could use national sovereignty to create new international agreements authorizing the tracing and seizure of shadow capital. They could, and already do so: the United States Internal Revenue Service (IRS) has broadened its power in recent years to go after Swiss bank accounts. The principle could and should be applied on a wider scale. The cooperation of European and South American governments would be possible if radical political parties assumed power in a majority of the states on those continents. This would require a global message disseminated through populist movements running on anti-austerity platforms. This would be possible in the event that center-right governments lost control of democracies through elections. Easier said than done, yes. But in the wake of the Arab Spring, the Chinese riots, and Occupy Wall Street, the possibilities have never been closer – perhaps they are just one massive financial shock away from materializing.
The real question, then, is whether or not the financial elite would allow a coordination of movements to happen, and how the struggle to seize shadow capital would cause them to counter-argue regarding any new and unprecedented powers of government. For now, such thoughts are in the realm of speculative fiction. But the conversation will take place sooner or later anyway, because the size of the shadow banking system makes the discussion inevitable, particularly in the face of cuts to “entitlements” and non-profit services. If a majority of Americans support higher income taxes on the rich to pay for deficit spending, then it’s virtual certainty that they would support something like a capital gains tax on shadow banking investment – and a revised 35% tax on even ten trillion dollars would irrevocably change how Americans feel about taxation and finance.
Again, the stability of the western democracies depends a lot upon the successful management of the middle-class. Any economic collapse on the scale of 2008 before unemployment rates have had time to re-correct back to 2005 levels will mean intensified political movement to the extremes. An absence of anti-austerity messages in the public realm will push more middle-class “losers” to the right-wing. This will heighten the chances for new wars and more organized social violence, as we’re seeing in Greece with Golden Dawn. It will also solidify local sovereignty movements, as we’re seeing in Spain and Scotland.
What global leaders like Washington and Beijing clearly agree on is that their own sovereign “security” rests upon upholding the principle that this generation of elite should manage their respective populations, and also that they deserve it. In both China and the US, this elite come from an exclusive professional class. Many use government to become wealthy or to increase their personal wealth. Whatever else one wants to say on the subject, it’s clear that ordinary Americans with ordinary jobs do not participate in politics except as voters. In China, they do so as consumers and workers; that’s it. Therefore the legitimacy of maintaining such vast systems of accumulation and graft in each country rests upon whether or not a majority of ordinary people believe that they can achieve comfortable lives in those systems. As long as one confines and marginalizes the non-believers, the elite in both countries are able to maintain their own power. One does it through the legitimacy of elections, which re-set expectations for a majority every four years and allows the incoming political class to claim “they’re different.” In China, it rests upon the fiction of the wise party, and their calculated plans for continued economic growth.
The paradigm of austerity
This is why we have to begin re-thinking the meaning of austerity. There can be no doubt that the current arguments about austerity don’t make financial sense when viewed beside the mind-boggling numbers in shadow banking, and even in global finance generally. This means that we need to see austerity’s logic as political. Politically, the myth of austerity must be made into real policies into order to convince people that there is a shortage of money. The budgets must be cut, and the like. Yet one of the real purposes of austerity is psychological. It exists to remind populations that there is a separate pool of capital for them.
To disturb this paradigm is to see into a different future for governments, for politics, and for the planet. All the “basic” relations of states to debt, and between central banks and populations, need to be immediately re-thought. Public debt isn’t “real” the way gravity is real: it’s a political and social paradigm that governs populations. It’s a common discourse for all mainstream political parties. An alternative to the current debt regime must appear not only because austerity isn’t really “real” or because its economically unnecessary, but because this infinite-growth interest-rate model of finance doesn’t connect with the urgent necessity of climate change. If all the talk about “de-growth” and “no-growth” is to be effective, we must also start at the largest scale and work backwards, whatever other initiatives take place locally.
The debt industry
Remember, public debt is an industry the same way that computers are an industry. Investors and central banks sell cheap capital to governments of all sizes (city, state, federal) as a business model. Although it fluctuates, treasury debt returns “yield’ to investors over time. Remove a discussion of inflation from the model for a moment, for example, and we can see the simple logic of this: today investors sell Spain or the United States money to use for public services, and in three years (or five, or ten, etc) Spain or the United States pay backs that money with interest – at 6% or at 3%, whatever.
Consider the infinite growth model of this scheme, however: the basic premise of the debt industry is that national economies must expand in order to pay the debt. Just like a “triangle scheme” requires each new player to seek out new partners to make the system work, the national debt industry requires that economies grow in order to pay back their loans. And just like a Ponzi mafia, if one misses the payment a “cut” must happen where it ‘hurts’ – education, health care, the biosphere. Get the money or else.
After getting a loan, then, financing national debt means that the overall growth and tax revenue of Spanish and US revenue must rise before the loan expires; their economies must grow or they must raise taxes or then cut services. This is where the logic of austerity begins: in economies of slow growth or recession, governments cut to pay the interest on the debt. They don’t cut because the money doesn’t exist – it exists. They don’t cut because investors are physically hurting or in trouble – they aren’t.
They cut for the simple reason that investors must get paid, and because they have control over capital and governments don’t. One might think that governments have too much power, but in this simple relationship one can see that investors as a class are as powerful as governments. Yet investor power doesn’t rest on popular sovereignty, as governments do. Imagine if the power of government was turned to regulate the source of debt, which is to say, investors. This means promoting the idea that the “business model” of the debt industry is requires regulation – imagine if one could not loan at interest rates higher than 2%, ever. An end to usury.
Moreover, in an era of shadow banking it boggles the mind that governments wouldn’t simply seize other forms of capital as an alternative to cuts. What we’ve learned, then, is that austerity mostly makes sense as a way for an industry – the debt industry – to preserve and protect its product – the product of public debt. There’s nothing sacred about it; the returns on public debt are valued by investors because they are supposed to be as good as tobacco or oil. Investors above all want constant revenue streams.
Yet the ecological and social costs of oil and tobacco are within the regulatory reach of government. What the government needs to do, then, is begin regulating the source of austerity itself: the debt industry, finance, and the shadow banking system. This would be a relative increase in the power of government, but that power would be aimed away from ordinary people and in their name. Debts are not sovereign; the people are sovereign. This concept is at the root of austerity riots. The police powers must be turned against the central banks, not away from them.
Debt is an economic tool of political repression
We have yet to hear the full explanation for why austerity is a political tool of repression, though. We should first recall that the debt business is a great business for investors, and it keeps many people living comfortable and in positions of great power. As we can see from these charts, too, purchasing the debt of other countries is a kind of mutual insurance – it preserves the current arrangement of globalization, and locks out alternatives. Countries that lend each other money need each other for stability. We can also see that debt benefits many government elites in the United States, in Europe, and in Asia. They directly benefit, socially and professionally and financially, from keeping the global debt regime in operation. Much has been written about the politics of the revolving door between Wall Street and Washington, so I won’t hit that point hard here except to say similar deals take place everywhere. Suffice to say that governments can use public loans to finance contracts that help to literally return capital on their own investments and to secure future projects, whether those investments exist in blind trusts or not.
The US government borrowed money from the debt industry and gave it to private contractors in the Iraq War, for example. The Iraq-contractors example is usually made to show how private industries benefit from public contracts, but we forget that the money for the contracts came from debt and borrowing, at least in part. This means that the debt industry has a direct stake in the dozen small wars the US currently still fights – more wars, more money. This alone demonstrates a need for regulation of public debt and sovereign interest rates: it’s highly suspect that Treasury borrowing allows wealthy elites to grow wealthier from war.
The more interesting reason for austerity, at least to us, however, comes from its power as a psychological method of repression, and from its power as a “true” myth. The for-profit media obviously has a stake in legitimizing the discussion on austerity because corporate news is inevitably pro-growth and pro-corporations. Yet the circulation of the myth creates a paradigm where people come to have emotional experiences that grow from the stories that animate austerity and debt, and those emotions make the overall architecture of the debt industry valid. This is where the stereotypes of “welfare queens” or “greedy 1%” elites hoarding their income taxes come into play. The myth needs characters, whether the character is Romney or the 47%.
Yet to believe in this myth means to accept the implicit logic of debt – that it’s real, that it’s natural, that it’s valid. To engage in the debate about where to “find revenue” during the fiscal cliff is to accept the terms of the debate. And when one accepts those terms, one inevitably must think about the “cuts.”
The New York Times often has interactive graphics where they invite the reader to balance state or federal budgets by raising taxes or cutting spending – but they control the options by never allowing for larger, more radical, and more democratic solutions to the debt crisis. This control is also over people’s imaginations. Such a “liberal” response to the problem might contain more obvious room for compromise than the fascist alternative, but it still manages to achieve a victory against ordinary people because it legitimizes the debate itself. When one accepts the the need for cuts, one turns against others – one turns against other people. One believes there isn’t enough money for everyone.
This mindset of scarcity is the ultimate weapon for any group of governing elites in any country. This is why austerity benefits both the political elite and the super-class of the ultra rich. The ultra-rich – the groups behind the debt industry and shadow banking – need austerity to promote the idea that debt is sacred and must be repaid on their terms. This myth helps promote the idea that there is a scarcity of money.
But politicians – whether they are part of those groups or not – need austerity to convince people that the current political regime should stay the same. They need the current regime to continue because they are in charge of it. Their power, politically and financially, is a direct result of their privileged positions in government. Investors need them to say yes, even though they have the power to say no. They have no personal interest in entertaining huge ideas about regulating the debt industry or changing the very nature of public debt, or in seizing and slicing off huge flows of capital from the dark pools. But they could be made to understand that another regime is ready, and that might pressure them to act in novel ways.
So for these political managers of national populations, austerity is useful because it means their arguments are about how to cut the services of people who have little power. Their jobs would be much harder if they had to cut the investment returns of the debt industry. On the one hand, they could make changes to the tax system and government services so that, inevitably, hundreds of millions of people receive less, even in an age of wealth and prosperity. On the other hand, they could turn around in their positions of representative sovereignty and challenge the financial system that brought them to power and that secures their personal future. It’s clear austerity is a better alternative for basic reasons of self-interest.
Next: Shadow banking and slow economy
In our next blog, we will examine these questions deeper, and how the “slow economy” works in more detail, since this is where most of us live.