by Tim Di Muzio
Credit rating agencies Due to the liberalisation of foreign direct and foreign portfolio investment since the 1970s, credit rating agencies have become more central to the architecture of capitalisation (Sinclair 2005). Credit rating agencies determine the creditworthiness of their clients and this in turn helps to determine asset values, potential asset values and interest rates. As a general rule, the more risky the asset, the lower the price will be. For example, if a credit rating agency assesses a firm’s potential to earn future profits and finds it wanting, then the price of its corporate bonds will likely reflect the riskiness of the security. The same goes for government debt. If credit rating agencies downgrade a country’s debt issues, the government can expect to pay more in interest due to the perceived riskiness in servicing its debt to private creditors. In this way, credit rating agencies can exert enormous power over publics that need to borrow from dominant owners and/or the institutions they own. The big three at the international level are an oligopoly – they control 95% of the market and assess trillions of dollars in debt every year. They are Moody’s Investors Service, S&P and Fitch Ratings. The first two companies control about 40% of the market each while Fitch is left with 15% (Kingsley 2012).20
Credit rating agencies at the country level, such as Experian and Equifax, also help banks and other financial institutions capitalise the income of individuals by assessing the creditworthiness of potential borrowers. The financial life choices of individuals as they pertain to credit and debt are quantified into an overarching credit score. Typically, the higher the score, the more creditworthy the borrower. Equally, the lower the score the more risky the client might be. The score is typically unforgiving. It does not negotiate, sympathise with difficult life situations or desire to hear justifications or excuses for past deviances. It does not care if workers or their family members fall ill, whether the unemployment rate is particularly high in a given area of the country, or whether borrowers simply defaulted because their debt load was too high and a reasonable life could not be lived without walking away from debt. The number tells all: creditworthy, highly risky or somewhere in between. If credit is extended to the un-creditworthy, the borrower is typically condemned to do penance in the form of paying higher interest rates and often burdensome fees. For those without access to bank credit, there is a litany of corporate bottom feeders that are ready to capitalise on their misfortune. By and large, these institutions and their owners capitalise the future pay cheques of low-income workers. While they are willing to extend credit to those who do not have access to bank credit, they do so on far more punitive and often criminal terms (Powell 2009). Although it may not be as large as Wal-Mart or Exxon Mobil, one of the biggest players in the game is DFC Global Corp., with a market capitalisation of about US$411 million. Minimum wages that fall below the poverty line as well as low wages more generally feed the desperation of its clients and the wealth of its owners. And just who owns DFC Global Corp.? The ownership of the firm is largely masked by the institutional owners who own the majority of the company’s shares. But Jeffrey Weiss, Norman Miller and Randall Underwood are part of the 1% that capitalise the future pay cheques of low-income earners, and they can do so only because there is a scarcity of income for the working poor.
Thus credit rating agencies and the firms they work for exert enormous power over the capitalist architecture of power since they are largely charged with assessing the risk of default or the length of potential default. This in no way means that they are good at their jobs. Plenty of evidence – in large measure due to conflicts of interest – suggests that the rating agencies are just as concerned with profits and prone to malfeasance and fraud as are the firms by which they are often employed. Sean Egan, a founding partner of a small rating company with no conflicts of interest with the companies it rates, gave the following United States Congressional testimony:
The current credit rating system is designed for failure, and that is exactly what we are experiencing. AIG, Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Countrywide, IndyMac, MBIA, Ambac, the other model lines, Merrill Lynch, WaMu, Wachovia, and a string of structured finance securities all have failed or nearly failed to a great extent because of inaccurate, unsound ratings … Issuers paid huge amounts to these rating companies for not just significant rating fees but, in many cases, very significant consulting fees for advising the issuers on how to structure the bonds to achieve maximum triple-A ratings. This egregious conflict of interest may be the single greatest cause of the present global economic crisis. This is an important point which is often overlooked in the effort to delimit the scope of the across-the-board failures of the major credit rating firms … there should be no doubt that none of this would have been possible were it not for the grossly inflated, unsound and possibly fraudulent ratings.21
Ratings can be viewed as ‘inaccurate’ only if we forget that the agencies responsible had a direct financial interest in pleasing their clients. It should also be recognised that the global financial crisis was not the first time the judgement of these firms faltered. But despite clear conflicts of interest and Congressional investigations, the rating agencies have used their power to curtail any effective reforms (Gordon 2013). Although many have lost fortunes due to their actions, the credit rating agencies have also served to enrich members of the 1%.
Institutional investors Institutional investors have become central to the architecture of capitalisation and some of the largest ones wield enormous power. Institutional investors are non-bank organisations that trade securities in large quantities. They act to collectivise or pool the investment contributions of individuals. Since their directors or managers are assumed to have sufficient financial training and experience, they are often lightly regulated; hedge funds are almost completely unregulated. Institutional investors comprise mutual funds, pension funds, insurance firms, hedge funds and sovereign wealth funds.
A mutual fund is an investment vehicle that pools the investment contributions of its members to make investments in stocks, bonds and other income-generating assets, such as commercial paper. Some privileged workers who are not capitalists or in the 1% may have money invested in mutual funds; if their money manager is successful, they will benefit from professional management and portfolio diversification. Total worldwide mutual fund assets amount to about US$27 trillion, with US funds making up roughly half the total.22 Pension funds are also a pool of individual contributions but they are established by an employer and run by a professional money manager. Pensions are paid out as workers commence their retirement. The Government Pension Investment Fund of Japan is the largest pension fund in the financial world with about US$1.3 trillion in capitalised income-generating assets. Insurance firms can also be considered institutional investors since they collect premiums for various policies (for example on life or car insurance) and invest these premiums in money-making corporations. Berkshire Hathaway is the largest non-life insurance company with a capitalisation of US$284 billion.
Hedge funds are essentially mutual funds for the 1%. They require a large initial investment that would be prohibitive for most workers. Managers of hedge funds typically use more aggressive investment strategies than their counterparts running mutual funds. Since they raise a massive pool of money from the 1%, they can use this initial fund as a basis to borrow additional capital, swelling their potential gains. The world’s largest hedge funds by assets under management are in the United States and the UK. Collectively, the industry has about US$2 trillion in assets under management – a large sum but a small fraction of the wealth held by the global 1%.23 According to the Sovereign Wealth Fund Institute, the assets of all sovereign wealth funds total just over US$6 trillion. By far the most significant source of investment money comes from states making money from oil and gas sales. Sovereign wealth funds are typically created to diversify a country’s revenue streams and to benefit its economy and citizens. The largest fund belongs to Norway, which has US$818 billion in assets
under management.
But far from just describing institutional investors, we must also consider them as institutions of organised power given that they control large pools of capital to be allocated throughout the global economy. In the international political economy literature, Adam Harmes (1998) has done a great deal to explore the impact of institutional investors on the global economy and the consequences for democracy and the 99%. His Unseen Power (2001) should be required reading for anyone who wants to understand the global political economy of institutional investors. Harmes argues that, with the rise of institutional investors since the 1990s, investment decision making has largely been centralised and capital allocated more collectively. Since fund managers are concerned with beating the average rate of return in their field and for their level of risk, they are highly competitive and prone to investing with a short-term horizon in view. But since they also control large holdings, the larger institutional investors can affect market prices. For example, suppose a fund has a considerable stake in the Ford Motor Company. If the fund manager is unimpressed with Ford’s earnings targets and wants to exit by selling shares, selling them in bulk might trigger alarm bells among other fund managers and the price of the shares may quickly plummet. So size matters since it can affect share prices. Because of this, Harmes argues that fund managers have been keen to put pressure on corporate leadership to focus on boosting the share price. Some of the ways in which corporate managers have accomplished this goal are by offshoring employment to lower-wage countries with fewer if any environmental protections, by downsizing and flexibilising their existing workforce, and by selling company assets. The money saved or earned can be used in share buy-back schemes. When companies spend their cash on purchasing their own stock, they can boost the price of shares and make the owners of the firm wealthier. Another way in which fund managers exercise power is by lobbying governments to protect and/or advance their interests – for example, fighting to keep taxes low on income made from investments. Harmes also suggests that governments may lose policy autonomy because certain policy decisions – for example, trying to implement a universal healthcare system in the United States – may trigger the institutional investors to begin an investment strike that could send interest rates soaring.
But institutional investors do not just coerce corporations and governments. Harmes argues that there is a consensual moment of domination as well. This is because a portion of the 99% will have some money invested in these institutions. In this way, their long-term interests (the desire for a decent retirement) may line up with the quest for profits. However, this relationship is not without contradictions: for example, the now defunct energy trading company Enron sabotaged California’s energy grid by forcing shutdowns. As millions went without power (including hospitals), the price of electricity skyrocketed and Enron made billions from the sabotage (Borger 2005). When its scheme eventually came to light, Californians were understandably upset, but a former trader at the company told them to calm down. He remarked that the California Public Employees’ Retirement System (CalPERS) was invested in Enron and therefore benefited from the sabotage. In this way, CalPERS effectively capitalised Enron’s sabotage of California’s electricity grid. Events like these suggest that the relationship between workers and the 1% – who do have some stake in the game, particularly through their pension funds – is more contradictory than it might appear on the surface. Another example would be workers invested in companies that avoid taxes, downsize, offshore jobs, create weaponry and destroy the environment for future generations.
Central and commercial banks In some ways, central banks are the most important institutions in the capitalist architecture of power since they are supposed to help regulate the money supply. It may be surprising for some to find out that the vast majority of central banks are not operated by democratic governments but operate at arm’s length from elected politicians – even where the government is said to ‘own’ them, as in Canada and Finland, for example. In some cases, such as the US Federal Reserve, they are owned outright by private banking corporations – and by the dominant households who own those banks. What this means is that the owners of publicly listed banks in the United States effectively own the Federal Reserve and profit from the power of commercial banks being able to increase the money supply by making interest-bearing loans. Owners of banks also have an ownership stake in the international central bank: the Bank for International Settlements (BIS) in Basel, Switzerland. The BIS claims to be the oldest international financial institution in the world, having been established in 1930 to deal with Germany’s war reparations. Since then, it has become a central bank to the central banks of the world’s richest nations. The BIS is largely owned by 55 central banks worldwide, while 14% of its shares are privately owned – by whom is not made public. All the owners receive dividends from the BIS.24 The bank is somewhat remarkable for largely going unnoticed in the realm of international finance. The fact that its meetings are super-secret may help to explain why (Lebor 2013). As two reporters noted about the BIS:
the building is largely bugproof, the goal being to prevent anything from leaking to the outside and any unauthorized individuals from penetrating into its interior. There are no public minutes of the meetings. Everything that is discussed there is confidential. The word transparency is unknown at the BIS, where nothing is considered more despicable than an indiscreet central banker … These traits make the BIS one of the world’s most exclusive and influential clubs, a sort of Vatican of high finance. Formally registered as a stock corporation, it is recognized as an international organization and, therefore, is not subject to any jurisdiction other than international law. It does not need to pay tax, and its members and employees enjoy extensive immunity. No other institution regulates the BIS, despite the fact that it manages about 4 percent of the world’s total currency reserves, or €217 trillion (US$304 trillion), as well as 120 tons of gold (Balzli and Schiessl 2009).25
So the central banks – with some ultimately owned by the private households of the 1% – have their own international central bank. Through their control of interest rates they influence the dispensation of credit, which is primarily handled by commercial banks. The fact that most governments choose not to issue their own debt-free currency other than notes and coins is one of the main reasons why governments that do not raise enough money in taxation to meet their spending priorities must borrow from the private sector: private interests have separated the power to spend money (part of government fiscal policy) from the power to create it (central and commercial banks). For example, suppose an elected government wanted to build three new hospitals in an expanding urban centre. If it cannot raise enough money to finance the cost of these hospitals by taxing the population, it has to borrow at interest from the owners of capital. In other words, it has to go into debt to private owners to finance the hospitals. It must pay the cost of the hospitals plus interest to its creditors. Now, from the perspective of capital as power and a basic understanding of democracy, there is no technical reason why a government cannot just create the money to build the hospitals. But our elected governments do not use this power – the very power to create money has been capitalised and monopolised by the dominant owners who own significant shares in commercial banks around the world (Brown 2007; Collins et al. 2011).
For economic liberals, the fact that elected governments do not have control of the money supply is a positive good. The reason they give is that elected governments come and go and typically stay in power if they can promise their populations more goods and services and less tax. In this situation, economic liberals argue that governments will simply ‘turn on the printing press’ to placate the demands of their population for money and jobs. Put simply, it is reasoned that governments with control over the money supply spend as if there is no tomorrow. This, the economic liberals argue, will cause inflation, therefore reducing the value of money. For example, consider the Bank of Canada’s boilerplate:
This is not a fact but merely an assertion. We live at the most productive time in human history and businesses are not complaining about their ability to produce but about the limits of the market – limited by how much disposable income people have (Rowbotham 1998). There is little doubt that printing money en masse and at random could lead to higher rates of inflation. But this would be to assume that a public body in charge of issuing debt-free money would be incredibly inept and irresponsible. There is no good reason for believing that this assumption is a universal truth. Moreover, if economic liberals and central bankers do not trust elected officials, who, then, do they trust? Since the majority of money in circulation is created by commercial banks through loans, it must be that economic liberals deem bankers responsible stewards of the money supply. But as the recent global financial crisis, along with a series of historical ‘asset bubbles’, has demonstrated, many of the world’s leading banks could hardly be said to have had the best interests of the public in mind. But the deeper point here is that most new money is created by commercial banks as loans, therefore making banks and their owners the primary allocators of credit and beneficiaries of interest payments. And since loans are largely premised on an individual’s creditworthiness, the 1% (who already own most of the planet’s income-generating assets) can largely borrow at their leisure. The few have easy access to society’s most basic and needed resource: money. The many do not. There is a scarcity of incomes and money; the proof of this is mounting household debt in the OECD and elsewhere. This is highly problematic for democracy and challenges the notion that our elected governments are indeed sovereign. The banking families of the 1% control and profit from the creation of our money as debt and it is the mounting interest on this debt that pushes up the prices of goods and services (ibid.: 292–308).