Capitalism’s Ozymandian Moment

Looking Upon Mighty Works and Being Afraid

Jeffrey Sachs is an insider.  He is part of the financial-academic-media-political complex.  But he is also a heretic.  He is a strident opponent of the theft and corruption of the finance sector in the United States.  In addition he  is also a fierce critic of the corruption of Washington and how it has become suborned to the love of money.  Other people’s money–being siphoned off into the back pockets of politicians and political insiders. 

In April this year he spoke at a Philadelphia Federal Reserve conference.  In the course of his remarks he had this to say:

I think, you know, your point, Larry, is a very powerful one. And at a not a literal level of single-purpose banking, but of, you know, a more general level, Glass-Steagall successfully did that for quite a long time, and its removal was a very, very cynical play by Rubin, Summers, Clinton, Gramm and others who all had very strong interests, personal interests, in the outcomes of that deregulation, and exploited the gaps that they created, and then to the chagrin of some of us at least were invited right back into the White House in early 2009, after they had made this calamitous mess, to be the ones supposedly to fix it. And I know that Summers, for example, continued to really institute moral hazard policies right and left by fighting against any limits on compensation of these people who had entered into the breach.

The insiders were cynically lining their own pockets and those of their class, exploiting opportunities which they themselves had created under the guise of sound monetary policy and financial probity.  But Sachs goes further.  He indicts the behaviour of these elites as criminal.  He is not using the term metaphorically.

So, this is a case where institutional reform of separating fractional reserve banking and basically the provision of liquidity from gambling should be done, but I would add this other point, which is that a lot of what’s happened actually and what’s been revealed is in my view prima facie criminal behavior. It’s financial fraud on a very large extent. There’s also a tremendous amount of insider trading, and you can even watch it when you’re living in New York, how that works.

He provides a specific example: 

So it’s not so mysterious, but we don’t even act – take John Paulson, for example. Paulson worked together with Goldman Sachs to defraud massively many European banks which bought the toxic mortgages that Paulson had put together. When this Abacus deal was taken up by the SEC, Goldman ended up paying a small fine. The chair of Goldman, of course, continued in his position and continued at White House state dinners, and Paulson wasn’t even mentioned once in any of the proceedings, and he took home a $1 billion dollar paycheck the next year, even as Goldman was paying a roughly $700-million-dollar fine, if I remember correctly, for the abuse that Paulson was part of. I can’t believe, no matter what the financial regulations, we can’t do better than that. That’s really pathetic.

What might some of the solutions be?  He raises the question as to whether the  fractional reserve banking itself creates the kinds of problems and unethical behaviour now so systemic.  This is an amazing shift from an insider. 

I think that it is quite important to re-create a mechanism where liquidity is separated from large-scale financial gambling. It’s really, in my opinion as a macroeconomist, it’s the collapse of liquidity that is the real macro danger. The rest is the collapse of confidence, lawlessness, decency and so on, but what made Lehman so damaging, of course, was how it infected the money markets, the interbank loans, and the complete drying up of commercial paper. This was the devastating effect. It was basically March 1933 replayed.

So liquidity is what is the real value here from a macroeconomic point of view. Loss of wealth, I could care less whether they make more or less money. I don’t even care whether they make big money particularly except I think a lot of them are crooks and that it’s based on a lot of nefarious behavior, but the macroeconomic significance is a kind of diamond in the banking crisis which we know to be part of a fractional reserve banking system.

And it seems to me analytically we have two – we have basically two levels of decision making. One is separating liquidity in the banking sector from other kinds of speculative financial activity. This I would do for sure, and I would never have put Goldman Sachs back under the Fed’s protection as a banking unit so that it could receive direct loans from the Fed. That’s ridiculous, and sad, actually.

But the second point then is Larry’s point, and this is whether fractional reserve banking itself has value enough to keep it in its current form. I’m not convinced, I have to say, one way or another. I kind of, you know, grew up in a fractional reserve banking system. I do believe that it provides liquidity in normal times if regulation is good. I tend to believe that there is value in reserve banking, but it’s also highly volatile, as theorists have recognized at least for 150 years, and as Milt Friedman agreed, as Diamond said, as Larry has pointed out, and I think we have the choice, could we really have liquidity without fractional reserve banking?
If we could, we might be able to address, you know, another, another degree of this problem.

The final point, of course, is separating the politicians from the crooks, but maybe that’s so close together that they can’t actually be separated. Maybe it’s just the same community.


Finally, he bluntly addresses the pervasive institutional immorality now rampant on Wall Street, one aspect of which is the extent to which politicians, regulators, and administrators are effectively being bribed by Wall Street insiders and participants. 

But I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological. And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to people, counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, you know, in a quite literal sense. And they have gamed the system to a remarkable extent, and they have a docile president, a docile White House, and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I’m afraid to say, and no party is – I mean there’s – if not both parties are up to their necks in this. This has nothing to do with Democrats or Republicans. It really doesn’t have anything to do with right wing or left wing, by the way. The corruption is, as far as I can see, everywhere. But what it’s led to is this sense of impunity that is really stunning, and you feel it on the individual level right now, and it’s very, very unhealthy.

I have waited for four years, five years now, to see one figure on Wall Street speak in a moral language, and I’ve not seen it once. And that is shocking to me. And if they won’t, I’ve waited for a judge, for our president, for somebody, and it hasn’t happened. And by the way it’s not going to happen anytime soon it seems.

Capitalism has been put forward as a superior socio-economic regime to socialism.  Both, however, are fatally flawed to the extent they are executed by immoral, sinful participants.  Socialism is terminally plagued with envy and covetousness.  It seduces men to indolence.  Capitalism is fatally plagued with greed and a lust to exploit.  It rewards deceit and false trading.

Socialism has one echo of the Scripture that must not be lost: the love of, care for, and concern over the poor.  It’s mode of procession, however, is evil from the get go.  It makes standards of justice and law and administration subject to consideration of another’s socio-economic status.  Consequently, socialism is intrinsically unjust and unethical.

Capitalism also has one echo of Scripture that must not be lost: the celebration and defence of  private property. In this ethic it sets out to protect the private man, the private household or business from the rapacity of the powerful who can suborn, bribe and pervert the system to steal.  Capitalism provides a bulwark for Naboth to protect his vineyard against the covetousness of an Ahab and a Jezebel.  Capitalism in its fundamental ethic is anti-thief, anti-covetousness.  But its mode of procession, however, is also evil from the get go.  It insists on separating free economic transactions from morality.  To act with deception and intentional misleading is not intrinsically wrong in the capitalist ethic.  “Buyer beware” is its fundamental modus operandii, which makes capitalism intrinsically fraudulent, as a system of economic activity.

Capitalism cannot survive long term without drawing upon a fundamental duty of care towards clients, customers, and colleagues.  But capitalism itself does not provide such an ethic.  That is why capitalism will not survive unless it is grounded deeply in the Ten Commandments–which, of course, has long ceased to be the case.  But before it collapses, or is swept away in a paroxysm of revolutionary fury, it will proceed to a breathless rapaciousness, where clients are victims to be exploited, and laws and government are tools to be corrupted to one’s own advantage.  That is where the United States is at now.  That is what Jeffrey Sachs is railing against.

Like Sachs, we gaze upon the mighty Ozymandian works of Western Capitalism and are afraid.    
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