by David Orrell
In Great Britain, the financial sector was still an oligopoly, with the four biggest banks controlling some 75 percent of the retail banking market in 2013. This was a 10 percent increase from the precrisis levels that regulators criticized and were fighting for almost a decade. At the same time, the proportion of assets controlled by the six largest U.S. banks reached 67 percent, which means an increase of 37 percent from 2009 to 2014. The biggest bank in the nation, JP Morgan, has $2.4 trillion in assets, which equals the size of England’s whole economy. (The original J. P. Morgan, who began his career during the American Civil War buying defective rifles from an arsenal and selling them back to the army at six times the price, would have been pleased.)11 “They [the commercial banks] are still too big to fail, too big to jail, and too big to manage well,” says Robert Reich, a Berkeley economics professor and former U.S. Secretary of Labor.12
Since at least the time of the Medicis, banks have been at the heart of the global financial system. Only banks are granted the unique power to produce money and then charge interest for it. The question then is whether one can expect a change without a crisis that would really shake the world. (The one of 2007 and beyond clearly did not.) Bloodless revolutions do occur but are quite rare; and here the possibilities for change are conditioned by the fact that the monetary and political power structures are so intertwined that they often resemble a single organism.
Big Politics of Big Money
The so-called revolving-door phenomenon, in which Wall Streeters end up with government jobs and vice versa, is often traced back to 1934, when President Franklin Delano Roosevelt appointed the former head of the Columbia Trust Bank, Joseph Kennedy, to be the first chairman of the Securities and Exchange Commission. Since then, many bankers have gone to work for the government and at the same time talented and well-connected bureaucrats have been hired by top banks. The most visible in this sense is Goldman Sachs, number 18 on the Federal Institute of Technology’s list of companies that exercise huge global influence.
Sometimes dubbed “Government Sachs,” Goldman is “a political organization masquerading as an investment bank,” according to Christopher Whalen, the managing director of Institutional Risk Analytics.13 While in the spotlight for quite some time, its visibility only increased during the crisis. Former Goldman executive Henry Paulson led the Treasury when the idea to bail out the big banks was formulated. Later on, Paulson appointed Goldman ex–vice president Neel Kashkhari to oversee the $700 Troubled Asset Relief Program (TARP) fund, which was created to prop up financial institutions. For many, the climax came when the bank hired former Securities and Exchange Commission chairman Arthur Levitt right when it was about to get $10 billion in TARP funds.
Under pressure from those that perceived these deeds—and in more general terms, banks and the entire power structure—as arrogant and ignorant of people’s will, Goldman’s chief executive Lloyd Blankfein stunned everyone when he said that he is merely a banker “doing God’s work.” This lack of empathy (or a misunderstood joke, as Blankfein later presented it) was supposed to defend the ways politicians and financiers were dealing with the crisis and, above all, to vindicate the highly controversial bonuses paid out to bank executives—including those at Goldman—that were getting massive government support.
Blankfein sees himself as “a relentless apostle of efficiency,” explains Joris Luyendijk, an anthropologist who was hired by the Guardian to research bankers in London, adding that the city is full of these types.14 They perceive themselves as teachers who have to discipline their pupils, who have to cause pain, because it is for the greater good, for the sake of the world as God intended it, says Luyendijk. Of course, the same conviction of uniqueness is exercised by many professionals, for instance representatives of political parties, and often for a good cause; however, the problem arises when those who are supposed to function as a counterweight—the government and its institutions in the case of bankers—share the same worldview or ideology and render the system of checks and balances void. The result is to reinforce groupthink, or in other words the belief that the way the current system operates, with finance at its very core, is natural and thus right.
Moreover, as an examination of the sector’s expenditures shows, personal connections and like-mindedness are supported by intensive lobbying that aims at the general population and decision makers alike. According to the Bureau of Investigative Journalism, the City of London, fearing stricter regulation in the immediate aftermath of the financial crisis, spent £92.8 million lobbying government in 2011 alone. Its donations to the leading Conservatives totaled 51.4 percent of their funding. And at the same time, it could rely on the goodwill of 124 Lords (16 percent of the House of Lords) who have direct links to City firms. These statistics, as well as 800 full-time staff working and lobbying on behalf of the financial industry, led Andrew Simms of the New Economics Foundation to talk about “full-scale mobilization for an economic war.”15 One that, as box 6.2 indicates, the banks are winning.
Box 6.2
The Success of City of London’s Lobbying
Some of the more impressive examples of the bank lobby’s influence over the British government include
• Slashing British corporation and overseas subsidiaries taxes following an intense lobbying campaign
• Blocking European legislation aimed at limiting commodity speculation through a strategy devised jointly in closed meetings between the Financial Services Authority and finance industry bodies
• Constraining a nationwide not-for-profit pension scheme that had the potential to benefit millions of low-paid workers
• Killing government plans for a new corporate super-watchdog to police quoted companies
Source: Nick Mathiason, Melanie Newman, and Maeve McClenaghan, “Revealed: The £93m Lobby Machine,” July 9, 2012, Bureau of Investigative Journalism, www.thebureauinvestigates.com/2012/07/09/revealed-the-93m-city-lobby-machine/; Nick Mathiason and Melanie Newman, “Finance Industry’s Multimillion-Pound Lobbying Budget Revealed,” Guardian, July 9, 2012.
The Center for Responsive Politics similarly scrutinized the financial industry’s lobbying over the course of an entire decade. Its extensive research shows that the sector spent $5 billion on “political influence purchasing” from 1998 to 2008. Some $3.3 billion ended up in the pockets of officially registered lobbyists; $1.7 was then spent on campaign contributions. Goldman Sachs, for instance, spent $46 million (still less than Citigroup at $108 million or Merrill Lynch at $68 million).16
As Luyendijk says, these numbers only prove that the Anglo-Saxon model involves legal corruption. While this is called campaign contributions in the United States and Great Britain, it would be labeled corruption should it happen in developing countries, argues Luyendijk, adding that the financial lobby manages to steer attention away from crucial issues. Thus we argue about the financial transaction tax while the way money is created and distributed—and the structural power that comes with it—remains largely ignored by those who can change the order of things peacefully—politicians.
As finance became globalized, the “money power” became increasingly international. Monetary arrangements consisting of a powerful state and a powerful financial industry could suddenly exercise influence across borders. Money thus became de facto one of the weapons of choice for twenty-first-century warfare. Ian Bremmer, president of Eurasia Group, the world’s largest political risk consultancy, considers the weaponization of finance (i.e., creative use of access to capital markets or sanctions that deprive a country of foreign funds, among other things) to be a top political risk.17 Global and regional financial behemoths are able to change the direction of entire economies, both intentionally and accidentally. Central and eastern Europe learned this the hard way at the beginning of the GFC. The foreign headquarters of banks that have near monopoly in most of these countries all but stopped lending in order to build capital reserves for potential losses in the West, with the result that the crisis in
the East came faster and was deeper than necessary.
This illustrates how the current setup benefits a group of powerful states and financial corporations that on a structural level have tight connections and a common interest to preserve the status quo they underwrite. Being in charge, they can “discipline,” to parallel Luyendijk’s terminology, individuals as well as states that “misbehave.” This can be for better, meaning for the sake of momentary order that enables coexistence, or for worse.
It is thus no wonder that experts such as Albrecht Ritschl at the London School of Economics predict that the next global crisis may be caused by speculative attacks on states.18 Given that the late global power structure is breaking down, with no agreed framework or global-policing agency, attacks launched by sovereigns, corporations, or interest groups simply cannot be excluded. Money may not seem like much of a weapon, but as Soddy knew, it contains within its bonds more power than any number of thermonuclear devices.
The Rise and Fall of the Dollar Empire
The battle for supremacy between the world’s mega-currencies, which shows the money power in full display, is reminiscent of the battle between rival empires that characterized the gold standard era—with the difference that in a virtual currency era, strength can be a form of weakness and vice versa. Consider, for example, that (mostly) virtual cybercurrency, the U.S. dollar. If money is “like any other language through which people communicate,” as American author Kent Nerburn says, the greenback has to be considered lingua franca. Along with English—which only reconfirms the overarching influence of the Anglo-Saxon culture—it is understood almost universally.
The U.S. dollar is the ultimate choice for central bankers shopping for reserves, despite dropping from 70 percent of total share in the year 2000 to a 61 percent share at the beginning of 2014.19 At the same time, it is the world’s most used currency in international trade and finance and a currency in which key commodities such as oil are overwhelmingly priced. Whether one is a backpacker looking for a warm bed and meal in a remote corner of our planet or a high-flying businessperson negotiating a megadeal in one of its financial centers, one can rely on the greenback. This holds despite all the tricks Washington has played on both.
Historically, those who issue money tend to abandon their promises to uphold the value of these IOUs when it suits them to do so. Ancient Romans, for instance, kept adding an ever-smaller amount of silver into their coins, with the eventual result that people lost faith in Roman money and, by extension, the empire. The United States is following a path that is strikingly similar. Since the establishment of the Fed in 1913, the dollar has lost 96 percent of its value. Measured against the currencies of U.S. trading partners, it lost 25 percent of its value since the floating system was introduced after the shock of 1971 (though it made an impressive comeback in 2015). In this context, it seems all the more relevant that currencies have held onto their prime positions for approximately a century since 1450; the dollar has been in charge for ninety-four years.20
Rome, concluded fifth-century Christian priest Salvian of Marseille, collapsed because it deserved to collapse; because it had denied the first premise of a good government, which is justice to the people.21 Sixteen centuries later, the same goes for the United States, as both foreign and domestic critics of American policies argue. They point out that Americans have seen their savings inflate away, making the greenback fail to deliver on the promise that currencies store value. The international community, as described earlier, has seen Washington taking advantage of the fact that it owns the Fed—a world bank—and controls the World Bank that globally promotes the gospel of neoclassical economics and thus reinforces the status quo.
It was the possession of the printing press of the world currency that enabled Nixon to shock the globe in 1971. As political economist Susan Strange put it, “The U.S. government was [thus] exercising the unconstrained right to print money that others could not (save at unacceptable cost) refuse to accept as payments.”22 And it is because of this very possession—along with the belief that there is no alternative—that the dollar remains the most important currency, despite the gradual loss of value, which reached its climax at the beginning of the financial crisis in 2007, and despite the rhetoric that was flying high even before the implosion of the U.S. real estate market and became even fiercer thereafter. Russian president Vladimir Putin, for instance, has characterized Americans as “living like parasites off the global economy and their monopoly of the dollar”; both Brazil’s finance minister Guido Mantega and Indian prime minister Manmohan Singh mentioned the currency wars and the United States in the same sentence; and other more or less respected leaders have chimed in. They all called for a rearrangement of the global monetary order in a way that would correspond with reality and not the distribution of powers in the immediate aftermath of World War II.
Such calls should not be expected to yield results any time soon. First, the United States will most certainly do all it can to preserve its privileged position for as long as possible, as discussions with China about the strengthening of the role of SDRs within the global structure reconfirmed.23 Second, monetary regimes and their particularities tend to have a rather robust momentum, as shown by the overweight role of the British pound within the current structure. Third and foremost, currencies need to be backed by sovereigns that appear strong, stable, and predictable enough to uphold their promise to preserve (at least some of) the value of the currencies.
When it comes to credibility, the intangible quality that decides how much the currency is really worth (meaning whether its face value or the currency itself is accepted), the United States still enjoys a relatively strong position compared with its (potential) challengers: given the size of the global economy and the resulting demands made on its principal currency, the moneys of smaller powers such as Australia, Switzerland, and Canada will not suffice. That leaves the world with the euro, which is dealing with its childhood diseases, and the yuan, which is not even at that stage. Thus, “the dollar may be our currency but it’s your problem,” claim made by Nixon’s Treasury secretary John Connally rings true for now and the near future.
Yuan: Power Within, Power Without
Beijing commands the second-largest economy in terms of nominal GDP and purchasing power parity, and might be number one by the time this book is published.24 This would be only a natural climax of thirty years of growth that averaged 10 percent a year and made it the fastest-growing major economy. Yet while China is both the world’s largest importer of many key commodities and the world’s largest exporter of manufactured products, the yuan only came to officially play a role in its international dealings in 2008. The reason? Chinese growth had relied on boosting exports by keeping the yuan undervalued, which in turned caused a significant inflow of the globe’s prime currency—the U.S. dollar.
When Chinese manufacturers sell American consumers their goods, the dollars received are converted to yuans (through intermediary banks) by the People’s Bank of China. Because China sells more products to America than vice versa, the result is that the central bank ends up with a surplus of dollars and a shortage of yuans. In a freely floating currency, the normal action would be for it to sell those excess dollars for yuans on the foreign exchange markets, thus lifting the yuan and narrowing the trade gap. But instead, the bank has used the dollars to buy U.S. Treasuries and has acquired the yuans it needs to pay the manufacturers by creating them. The central bank can therefore control the exchange rate, rather than leaving it in the hands of the foreign exchange markets. Another side effect is that the demand for Treasuries has kept U.S. interest rates low (though China sold some of those Treasuries in 2015 in order to defend the yuan against a resurgent U.S. dollar).
One danger is that the printing of yuans could lead to inflation. However, as when China imported massive amounts of silver from Spain in the sixteenth century, the rapidly growing economy has meant that the excess flows are absorbed (though note the expanding
credit bubble in things like real estate).25 Another flaw in the strategy became apparent in 2007, when Beijing’s holding of $1.5 trillion of U.S. financial assets, including the disastrously overleveraged Fannie Mae and Freddie Mac, proved a rather disappointing investment. (The two institutions, which were to support stable funding for the housing and mortgage markets, proved to be a black hole that Washington was forced to fill with the total cost to the parties involved yet to be determined.) This was a wake-up call for the Chinese, who became “obsessed” with the extent of their national power vis-à-vis the other great powers in the mid-noughties.26
In 2008, Chinese president Hu Jintao called for “a new international financial order that is fair, just, inclusive, and orderly.” Shortly afterward, Beijing started encouraging the use of its currency in trade, swap arrangements, bank deposits, and bond issuances in Hong Kong, which became the yuan’s prime offshore center.27 China thus began to address the mismatch between the fact that it is a power that can afford to violate the global rules when it comes to foreign trade but is in a far less comfortable position when it comes to the monetary issues that power that trade.
The question now is how quickly will Beijing be able and willing to come out from behind the U.S. dollar and bring its currency onto the global stage. Some economists such as Arvind Subramanian, the chief economic adviser to the government of India, claim that the yuan “could become the premier reserve currency by the end of this decade, or early next decade.”28 Subramanian and others usually cite rapid expansion in areas such as international trade, where the value of cross-border transactions in yuans totaled $78 billion in 2010, the first full year these were allowed. In 2014, Deutsche Bank expected this number to reach $988 billion, which would represent 50 percent year-on-year growth and would amount to 20 percent of China’s global trade volume.29 Moreover, the yuan surpassed the euro to become the second-most-used currency in international trade and finance in October 2013.30 In November 2015, the IMF decided to add it to its SDR basket of reserve currencies, where it joins the dollar, euro, pound, and yen. However, despite these milestones, most economists and political economists argue for a more distant horizon.