While the establishment of a system of credit, and the lowering of interest rates was a great civilizational, advance, the banking system could be captured and then controlled by the ‘barons of global finance’.
Geoffrey Ingham explains that this capture includes control over the production of money:
“Money expands human society’s capacity to get things done, but this power can be appropriated by particular interests. This is not simply a question of the possession and/or control of quantities of money – the power of wealth. Rather, as we shall see, the actual process of the production of money in its different forms is inherently a source of power.”76
John Maynard Keynes understood well how the prosperity of society is dependent on a sound, managed banking system, based on bank money, and low rates of interest.
He also understood that the development of banking was a threat to the owners of great wealth - society’s “robber barons”.
Under a well-managed banking system, and with the sagacious use of bank money, surplus wealth is no longer needed for loans and investment.
Furthermore, under a well-managed monetary system, and as explained above, interest rates can be kept low by the authorities (the central bank and the Treasury/finance ministry) to benefit society as a whole.
Both of these developments were and are anathema to capital-holders, as first, they render excess wealth redundant to the wider needs of society.
Second, they reduce the rate of return on lending. Indeed as Keynes argued,
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a low interest rate policy would lead to the ‘euthanasia of the rentier’; to the disempowerment of capital-holders as a class.
But then Keynes too was an optimist.
The New Age of the Rentier
Today we live in a world in which the public infrastructure that is money production has been captured and subordinated to the interests of a wealthy elite - finance capital. Rentiers - individuals or institutions that live by
unearned income - have not been euthanized by the banking system. On the contrary: they are in triumphant possession of it.
While capitalists may invest to create new capacity, the rentier simply exploits existing assets for cash flow. The rentier purchases an asset e.g.
land, which does not have costs associated with its production (because land after all, is created by nature), and charges rent on it. These rights to an asset enable the rentier to, for example, install tolls and extract fees from travellers; or to purchase hospitals or schools or football clubs and then drain rents from the users of those institutions – much as a landlord charges rent on a property. Here’s Michael Hudson, a scourge of the bank-friendly orthodoxy:
U.S. banks don’t make loans for what can be produced in the future.
They make loans against collateral already in place – including entire companies with high-interest “junk” bonds. Instead of extending loans to create new factories to employ people, new means of production, bankers look at what can be pledged as collateral on which they can foreclose.77
Rentiers as financial parasites
Today’s ‘robber barons’ under the pretext of ‘equity investment’, borrow huge sums of money to purchase e.g. a football club like Manchester United, or a company like Boots the Chemist. They then drain rent (debt repayments) from the corporate body, by diverting cash flows. These cash flows are
93 created and provided by the producers, managers, retailers and customers of, for instance, Boots, or by Man United football fans. Fans provide the cash flows by buying the club’s t-shirts or kit. By these means do rentiers (with little effort) drain the wealth of those with limited amounts of cash, but without collateral or other assets.
This parasitic behaviour is bad enough, but to increase the capital gains to today’s ‘robber barons’, governments make this kind of borrowing tax deductible. The result is a double whammy: massive exploitation and appropriation of the assets of companies like Boots, or football clubs like Manchester United. And declining tax revenues for governments from
rentiers disguised as ‘private equity finance’ or ‘debt leveraging’ companies:
e.g. Kohlberg, Kravis, Roberts, CVC Capital Partners, or the Blackstone Group.
These concessions to the rentier sector by governments are a painful form of fiscal ‘self-harm’ because declining tax revenues worsen the government’s rating with bond markets under today’s ‘liberalised’ financial architecture.
This leads to higher rates of interest on government bonds – paid by taxpayers mostly oblivious to these decisions.
And so the parasitic behaviour of the rentier gradually weakens the body fiscal, and with it the body politic.
‘Neo-feudal’ rentier capitalism: the story of Manchester United
Manchester United was taken over in 2005, at the height of the credit boom by the Glazer family of Tampa, Florida. The transaction was a ‘leveraged buyout’ which means that United was acquired, not with the existing wealth of the Glazer family, but with borrowed wealth, i.e. debt. By June 2010 this debt had escalated to over £784m.
The debt was secured primarily against the football club itself – meaning that the Glazers borrowed against an asset - the Man U football community - that could be ‘milked’ to generate regular, high returns, in the form of
94 revenue streams from the sale of e.g. rising ticket prices, Man U kits, TV rights (paid for by subscriber fans) and T-shirts sold, as I have personally witnessed, to already impoverished child fans in remote parts of Africa.
These revenues repay the high real rate of interest on the debt, but they also finance dividends for the Glazers.
The interest bill from Man U’s debt of £784 million over eight years, is estimated at £350m and the total cost in that short time (including fees, derivative losses and debt repayments) is estimated at almost £600million.
The blogger ‘andersred’ believes that Man U’s total costs from the Glazer structure will top £1bn by 2016.
Manchester United is not alone. Football teams throughout Europe have loaded themselves with debt in an effort to reach the top leagues that attract pay-tv revenues. It is a winner-takes-all pattern that is replicated in sector after sector. The money drives up wages for a lucky few but all too often ends in collapse and government bailouts.
Rentier capitalism and government bond markets
Under today’s liberal financial architecture, governments are encouraged to raise funding for public expenditure by borrowing from the private finance sector, and not from their own central banks. The rates on that borrowing are fixed by invisible and unaccountable players in global bond markets.
As a result of this dependence on private finance, the power of the global bond market over governments is used to force policy changes on reluctant electorates. At the same time the restless, reckless, conduct of global bond markets epitomises rentier capitalism. Those active in these markets use uncertainty and volatility to force up bond yields and to then drain streams of revenue from taxpayer-financed institutions. They revel in particular in the usurious rates that can be charged on bonds issued by the poorest, most vulnerable of states, for example Ghana, South Africa or Greece.
95 Finance capital despotically in command
Today in both rich and poor countries finance capital is despotically in command of democracies. Economic activity is held back; firms are bled dry by rentier activity; loans are hard to come by, and the rates on lending often usurious. As a result, productive and creative activity stagnates; firms and even states (think Greece, Spain, Italy) are weakened by the parasitic behaviour of finance capital, or, in the case of firms, are bankrupted. And millions of people are immiserated by unemployment; many more millions impoverished. Inequality has risen to levels unprecedented in history.
Today as the anonymous London Banker, notes:
“… the state has lost control of the currency as central banks allowed barons in banks and shadow banks to create money from
securitisation and quantitative easing. The state lost control of
markets as the Securities Exchange Commission (in the US) and the Financial Services Authority in the UK allowed those same barons to set up alternative trading platforms beyond any public scrutiny and to bastardise public exchanges with algorithmic trading and synthetic instruments priced against fraudulent reference rates.” 78
In the place of ‘the state’ we argue that democracy, operating through the state, has lost control of the public good that is the currency.
Democracy and the Euro
Otmar Issing, a neoliberal German economist, is well known as the
“Architect of the Euro” and was a member of the Executive Board of the European Central Bank as well as its first Chief Economist from 1998-2006.
He is also a great admirer of the ‘classical’ economist Friedrich Hayek. In a recent book on the “Making of the European Monetary Union”, Harold James quotes Issing as arguing that
“… many strands in Hayek’s thinking…may have influenced the
course of the events leading to Monetary Union in subtle ways …What
96 has happened with the introduction of the Euro has indeed achieved the denationalisation of money, as advocated by Hayek.”79
We can replace “the denationalisation” of money with something more explicit: the de-democratisation of money – the utopian fantasy of global finance capital.
When academics and beneficiaries of the public purse like Otmar Issing collude with creditors and financiers to grant finance capital such despotic power over society, democracies are inevitably hollowed out and
democratically elected politicians rendered irrelevant and powerless. This leads to disillusionment and despair with the democratic political process, and recourse to populism, fascism and other forms of protest.
This loss of democratic control over the financial system in general and private credit creation in particular means that the state cannot regulate in the interests of society as a whole. This is partly a result of powerful lobbying and manipulation by bankers; but also of public ignorance of the basic
elements of credit creation and bank money. Because the system of bank money evolved behind a veil of deception; and because this deception suits the interests of bankers and speculators – the “neo-feudal rentier class” - there is still widespread obfuscation about the creation of money by commercial bankers.
This confusion does not just persist in the public mind but also in the minds of professional neoliberal and even ‘Keynesian’ economists: the guilty men (and they are mostly men).
They will not understand until the public around them does.
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