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Why bringing the bankers to heel is so important…

On the days that, as an ecological economist, I should be closely following the Durban UNFCCC meeting I am finding it difficult to think of anything apart from the financial crisis and the Eurozone Soap Opera.

Why? It seems to me that there is little point in the illusory design, and then advocacy, of claimed solutions to the climate crisis in current circumstances – at least not while our societies are dominated by a elite that is in large part kleptocratic. What we are now witnessing is their destructive and ultimately futile agenda to rescue themselves at the expense of the rest of society. This is from a crisis which was, to a considerable degree, although not entirely, of their own making.

Simple messages about messy situations

Having written that I have to admit, however, that a message put like that is too simple. To explain the current situation by blaming bankers is largely right but it’s a message that needs qualification. That’s a drag because people prefer simple messages especially when they imply simple solutions. The easy to hear messages are easier to take in and give the audience more hope.

Alas, that is precisely why simple narratives are so seductively misleading and why they are suitable for political demagogues – but not for dealing with messy reality. That’s why I think it important to emphasize, before going on to describe the crimes of the financial elite, some of the other problems that would NOT be dealt with by locking up bankers.

Difficult as the message is to hear it seems to me that it is essential that the popular mobilisations of outrage and emotion against the banksters are informed by the fact that there are three crises, not one. There is certainly a crisis of the financial system largely created by a massive amount of elite fraud during the “euphoric economy” of the bubble years. However there is also a crisis of uneven development where competitive imbalances between many parts of the world have reached their outer limits. Also, probably most important of all, there is a crisis caused by the global economy reaching the limits to economic growth – with constraints in resource availability, and destructive pressure on overused ecological sinks. Let’s look at the last two, taking the growing competitive imbalances first.

China and the USA

At least some of the current conditions are the result of uneven developments that have evolved through competitive imbalances in the global economy. The relationship between the Chinese and the American economy is a case in point. The Chinese are really struggling to adapt their economic growth process to their domestic market and away from exports. This is because the US economy is collapsing and because it makes little sense to accumulate more dollars that the Chinese cannot spend in the US. When the US export market collapsed after 2007 the Chinese government boosted infrastructure and residential building on bank credit to maintain growth and employment – but thereby created a bubble that is now bursting.

The Eurozone Crisis

A very similar crisis caused by accentuated competitive imbalances reaching their outer limit has occurred in Europe too. Whereas the US-Chinese relation is based on the Chinese pegging the yuan-dollar rate, the situation in the eurozone is caused by there being only one currency for very different countries. And the “one size” for interest rates and exchange rates has definitely not fit all. One currency for the entire eurozone made it impossible for a number of countries to devalue to defend their traded good economy against the might of Germany.

In those circumstances peripheral countries which cannot compete with German imports, find themselves borrowing from banks to pay for an import surplus. They have also been tempted to support employment through the state sector funded on easy credit (e.g. Greece).

Alternatively, it seems to be the fate of economies that have stalled, because of competitive pressure, to seek easy profits in bank credit inflated real estate bubbles. In the EU this was partly helped along by EU infrastructural investment (Ireland and Spain). When the credit crunch happened the bubbles burst and the bad debts of the banks were passed to the states who were now anyway struggling with declining tax revenues and rising interest rates on state debt. This created a sort of a sub prime sovereign debt crisis – starting with Greece which already had large debts because its elite don’t pay taxes, because of the Olympic debts and because of disproportionate military expenditure that arise from the long-standing troubled relationship with Turkey.

As interest rates have shot up states that previously had little problem with fiscal deficits suddenly found it impossible to finance themselves and launched ferocious austerity programmes. In short it’s a mess – of competitive differences, imploding property bubbles and debt deflationary spirals on state finances in peripheral countries.

Needless to say these processes also undermine German exports and German banks. The recent summit did absolutely nothing to resolve that. In fact it is an illusion that tighter fiscal discipline will solve anything – because it does not address underlying causes. By all accounts, europe’s banks are now on the edge. Their inadequate capital brings them near to collapse.

The Limits to Growth

While the lights are going off all over the eurozone, that’s not even the main problem!. The really big issue is the predicament facing all countries on planet earth – the contractionary forces attendant on reaching the limits to economic growth. Let’s remember that a major part of the context that made it difficult for people to service all the debts that they had taken on were the spectacularly high oil and energy prices – particularly when oil producing countries did not spend their revenues back into circulation, but lent the money back as capital.

This is the stuff that Feasta and other ecological economists have been banging on about for several decades. Well we are there now. We have hit ‘peak debt’ at the same time as we have hit ‘peak oil’. When Ben Bernanke mentioned the fact that he “can’t print oil” he was referring to the remarkable fact that, despite the recessionary conditions, the oil price bounced back up again to over a hundred dollars a barrel. This will place a severe physical constraint on further growth and create particular difficulties for global transport given that it is almost wholely dependent on liquid fuels.

Slowly the peak oil message is being taken in. In a recent lecture Chris Martenson shows how limits to growth and peak oil ideas are slowly filtering into the mainstream. A big question is when the peak oil and limits to growth ideas move from being an increasingly influential minority view to the new mainstream that everyone takes for granted. At that point in time it will get taken seriously inside the political mainstream and politicians will stop bleating about getting growth going again – and wake up to the fact that different thinking is needed.

Market Psychology – when depression is a sort of “progress”

There’s an idea here from psychotherapy which I think might give us a useful insight. When a deluded patient, or one who has been in denial, becomes depressed, then that is, paradoxically, often taken by their therapist as “a good sign”. Their depression is connected to moving out of the denial state and actually taking in their real situation, which is not really as rosy as their deluded patient previously wanted to believe.

It is probably in conditions where “the markets” have….at long last…. begun to mentally adapt to how bad things are that they will at last be open to even more bad news, painful as that will nevertheless be. And the next step might then also become possible. An openness to the implications of the peak oil message may then mentally create the capacity to accept the reality of climate change too.

There is one view in which the discovery of peak oil by the financial markets will bring about a crisis of market confidence that then morphs into economic depression and collapse. However there is an equally plausible idea that turns that idea on its head – in other words, economic depression creates a state of turmoil in which, as people more realistically look at their desperate state, they are at last prepared to accept that peak oil is one of their problems. Then, once they have done that, it is a no longer such a big step to take in the reality of climate change too, and the whole idea of “limits to growth”. Alternatively, those who earlier held sway in the political mainstream by an optimistic view are now so severely discredited that they find themselves displaced by others.

At this point the entire Zeitgeist would change and creating a collective orientation for a radically different kind of economic development…..well, maybe….

….but before I get carried away in rosy futuristic speculation there are a few other matters that need sorting out – like the fact that we are governed in the interests of a kleptocratic elite.

It does not follow that if society takes on board how bad things are that everyone will come together and start to do what they can in the broader interest. The system that we currently have is defined by its purpose – which is for individuals to enrich themselves and to make as much money as possible. In conditions of contraction and collapse there are still opportunities to do that – and unless we are able to stop it those opportunities will increasingly shift from the production of ‘goods’ to the production of ‘bads’. By this I mean, for example, producing armaments, supplying “security services” and mercenaries, building and running prisons and prison work camps – or selling legal (or illegal) drugs to help people forget their fear, misery and pain. In this process the idea, derived originally from Adam Smith, that by pursuing self interest people will indirectly create broader social welfare, will be seen for what it is – a self serving ideology that gives carte blanche for ruthless people without scruples to do whatever they like.

Pre-revolutionary societies?

In a recent interview on the internet at “Democracy Now” I witnessed the economist Michael Hudson talk about the situation created by the Occupy movement in the United States. The victims of economic processes had started to talk with each other and were beginning to understand what was happening. He then concluded by described the USA as entering a “pre-revolutionary” phase. This was qualified by saying that he thought the revolution would be peaceful.

Indeed, it will have to be. However, that is going to be a tough call given the way in which the “forces of law and order” have responded so far – with pepper spray, gas and baton charges.

There are no ways of ignoring the potential for conflict ahead. A period of contraction inevitably throws up issues of distribution – how the pain is to be shared. All the wonderful ideas that you can find created by the Transition Movement will get us nowhere unless we also take this in. OK so we set up “life boat” community gardens everywhere – and who will own the land and how much rent will they charge us for the privilege of growing food on “their” land?

Even if we put our gardens on local authority land we are likely to find that the public authorities are charging the highest rents which desperation, caused by depression, makes possible. Last year at this time at a conference in Berlin I listened to colleagues from the USA telling how, for years, community gardens had been the only thing going in urban landscapes when the local economy had collapsed. So what were local authorities now doing? Community gardens were suddenly recognised as a profit opportunity so they were bringing in corporations to take over a process originally organised by grassroots communities.

Letting the real criminals get away and persecuting their victims

That’s why I think that one of the main jobs of work to be done at this time is to try to communicate to whoever has integrity in the public authorities to show that they are currently letting one the biggest crimes in world history take place before their eyes and then siding with the criminals against the victims.

The biggest crimes have been by the bankers and the legal action should be against them. At the moment chances of success for such an endeavour do not look good – yet they are not totally hopeless. This is shown by the recent announced legal action by the Massachusetts Attorney General against the biggest banks in the foreclosure game – namely Bank of America, JP Morgan, Citigroup, Wells Fargo, GMAC (now Ally) as well as MERS and its parent MERSCorp.

http://www.nakedcapitalism.com/2011/12/massachusetts-announces-first-comprehensive-lawsuit-against-major-banks.html

However getting successful legal actions against the defence of high paid lawyers, and getting penalties appropriate to the scale of the crime is another matter. Big corporations are fined less than the cost of their crimes and executives walk away unscathed regularly.

Corporate Psychopaths and the Crisis

Let’s look at some frightening facts about the nature of financial crime, the kind of people behind it and the influence that the criminals have now achieved in the political system. A few days ago a friend sent me a link to a peer reviewed paper in the ‘Journal of Business Ethics’ written by Clive R Boddy “The Corporate Psychopaths Theory of the Global Financial Crisis”. In the paper Boddy argues that “psychopaths working in corporations and in financial corporations, in particular, have had a major part in causing the crisis.”

“The Corporate Psychopaths Theory of the Global Financial Crisis is that Corporate Psychopaths, rising to key senior positions within modern financial corporations, where they are able to influence the moral climate of the whole organisation and yield considerable power, have largely caused the crisis. In these senior corporate positions, the Corporate Psychopath’s single-minded pursuit of their own self-enrichment and self aggrandizement to the exclusion of all other considerations has led to an abandonment of the old fashioned concept of noblesse oblige, equality, fairness, or of any real notion of corporate social responsibility.”

http://www.springerlink.com/content/9072633443675517/fulltext.pdf

Well, one can question whether there was ever an age in which things were better. In his major study The Secret Life of Real Estate and Banking Phillip J Anderson covers over two hundred years of American financial and real estate history. He shows that periods in which financial and real estate crime ran rife re-occur time and again. This crime was always tightly interconnected into the political system.

“One thing that stands out when you read US economic economic and banking history is the extent of political corruption, which can only be described as absolutely rampant. Today’s African dictator has nothing on a few of yesterday’s US politicians. Much, though by no means all, of the corruption was connected with real estate, railroads and banking” (The Secret Life of Real Estate and Banking, published by Shepheard-Walwyn, 2008, p.116)

In the theory developed by Hyman Minsky, the end of the economic cycle is typically a speculative boom during a period that Minsky calls “The Euphoric Economy”. In these periods criminal excess gets out of hand. Although most economists assume that market actors are rational calculating individuals, during a speculative boom they are no such thing. Many lose their emotional balance and operate in a manic herd, letting go of any kind of ethical restraint. During such periods criminal behaviour becomes the norm.

The “liars’ loans” in the sub prime market were criminal fraud. Lying on the loan applications was fraud. Giving loans when it was known there was no chance that they could be serviced to earn a brokerage fee was fraud. Overvaluing houses, so that even larger loans could be given out and even larger broker fees received, was fraud. Failing to keep adequate and truthful documentation about these loans was fraud. Packaging these ‘toxic assets’ and selling them on was fraud. Giving them AAA ratings without really looking was fraud or grave negligence.

Then knowingly taking out multiple credit default insurance and shorting these assets in the knowledge that these loans were toxic was fraud, as was using friends in the US government to ensure that AIG paid up on the credit default swaps when it went bust. At each step of the chain people made money by issuing and packaging up so called ‘toxic assets” that they knew were worthless – and by not taking out sufficient provisions against what was obviously going to be an avalanche of bad debts.

An epidemic of fraud and nothing done

As early as 2004 the FBI warned of an epidemic of fraud in the home loans market and of the likely consequences. So what was done?

Nothing. Yet, Professor of Economics and Law, William K Black, estimates that there must have been at least a half million felonies committed.

http://www.law.utk.edu/faculty/heminway/SEALS2010/BillBlack(FullArticle)(SEALS%202010).pdf

Why the failure to act?

In part nothing was done because toxic economic theory said that nothing needed to be done – because markets were efficient and could price in risk for themselves. When it was assumed that nothing needed to be done the markets could be taken over by criminals.

“Cometh the hour, cometh the man” – “Cometh the euphoric economy, cometh the fraudsters and psychopaths”.

In an earlier article on this blog I mentioned a scientific study, quoted on the website of the German magazine, Der Spiegel, comparing finance market traders with psychopaths in a swiss jail – where the traders come out looking a lot worse.

“….the thing that mattered above all else to the traders was to get more than those that they were playing against and they used a lot of energy to damage these others”. The researcher compared these traders to someone who had the same kind of car as their neighbour and who used a baseball bat to attack the similar car on the street, so that they were on top.

“Aktienhaendler aehneln Psychopathen” in Der Spiegel 39/26.9.2011 or at http://www.spiegel.de/wirtschaft/unternehmen/0,1518,788232,00.html

After this I came across a similar study cited by George Monbiot, published by the journal “Psychology, Crime and Law”. The study’s authors, Belinda Board and Katarina Fritzon, tested 39 senior managers and chief executives from leading British businesses. “They compared the results to the same tests on patients at Broadmoor special hospital, where people who have been convicted of serious crimes are incarcerated. On certain indicators of psychopathy, the bosses’s scores either matched or exceeded those of the patients. In fact on these criteria they beat even the subset of patients who had been diagnosed with psychopathic personality disorders.”

“The psychopathic traits on which the bosses scored so highly, Board and Fritzon point out, closely resemble the characteristics that companies look for. Those who have these traits often possess great skill in flattering and manipulating powerful people. Egocentricity, a strong sense of entitlement, a readiness to exploit others and a lack of empathy and conscience are also unlikely to damage their prospects in many corporations.”

Anyone who has seen the film “Inside Job ” will have seen how this happened in the USA. The film puts faces to the chief people responsible – including the scandalous role played by establishment economists. For academic insight one can also read the writings of Professor William Black, who, in an earlier job, led the prosecution process against the fraudsters of the Savings and Loan crisis. He too writes about the psychopathic personality characteristics of the leaders of corporations perpetrating financial fraud.

What ought to happen during, or at least after, a fraud epidemic is that the fraudsters get their come-uppance through legal action against their crimes. It happened at the end of the Savings and Loans Crisis of the late 1980s in the USA. A thousand were convicted and many ended up behind bars. What is alarming about the current situation is that there is little sign now that this is happening. The political system seems to have been taken over by the super rich which explains the upsurge of the Occupy Movement in the USA and globally.

Zombie banks and a parasitical financial sector

The elite are now so powerful that they were able to walk away from the crash with their fortunes intact – and the financial corporations that they created, that are really insolvent, are left in a sort of suspended animation, like vampires clinging onto a sort of life by draining the resources from the global economy.

The attempt by the financial sector to cling to life has turned its relationship to the productive economy into parasitism. In the UK for example the banks contribute next to nothing to the productive economy – only 8% of their loans are to productive investment. Instead the UK banks engaged in much the same kind of reckless lending which pumped up land and property prices and destabilised the economy. As in the USA, the accountants, politicians and regulators were hopeless or complicit by doing nothing to prevent the inevitable disaster.

As Black explains, when the managers of banks run them in their own private interests they go hell for leather to build up apparent assets by relaxing lending standards – lending responsibly cannot quickly build up “assets”in the way that lending to anyone can, irrespective of whether they can pay back. That is bound to look good initially and is therefore good for bonuses – especially if you don’t also set money aside for the bad debts that are then going to happen. So here’s the story of Royal Bank of Scotland and HBOS – whose senior managers walked away with their golden handshakes, leaving the taxpayers to foot the bill when the banks crashed.

So where does this leave us?

As explained at the beginning of this article there are really three dimensions to the current crisis: the banking and finance dimension of elite fraud; a crisis of uneven development accentuated by competition that has reached outer limits; and a limits to growth crisis. Action to clean up the banking sector, even if successful, will not alone resolve all of our predicaments which are far too complex and deep seated.

That said, without dealing with the bankers and the banking system we will not get far in resolving the other problems. During the boom a massive inflation of financial assets was created that only has value, ultimately, if these assets are able to function as claims on real wealth and real economic activity. But there is no prospect of expansion of real productive capacity. There is no sign whatsoever that a robust economic growth will get going again to make possible a servicing and repayment of the debts out of rising income. The result is that societies are being turned into debtors’ prisons for a psychopathic elite – although this process is being contested. As the Occupy Movement clarifies what it stands for it is to be hoped that the contest with the financial system takes a more definite form. In this respect we need some kind of manageable debt jubilee that is fair to all, including those who are not in debt. We need to take away from the banks the right to extend credit by creating new money. And we need to investigate and clean up the chief perpetrators of banking crime and fraud.

There is no easy way out of our various predicaments – there will be a long and difficult struggle for a contractionary transition hopefully to a different kind of energy system and to a different kind of society. What an ecological society needs to look like has been known now for decades but we have made little progress getting there. We need re-localised economies, using ecological design principles and technologies, with a strong emphasis on community economic arrangements managing the spaces and places where we live (reviving commons principles for communities that are collectively managing places).

It is either that or the profits of ruthlessness and barbarism will drive and guide future economic development because the antics of the banking and finance system have stood in the way of eco-economic transition. The elite of super rich psychopaths are not the least bit interested in participating in an equitable transition and making it climate friendly. They are desperately hanging onto any strategy, any move, that will help them retain and re-inflate the value of their paper assets – which, since growth cannot occur, must inevitably be at the expense of the whole of the rest of society. It is their antics, their strategy, their priorities, their way of describing things that are broadcast in the mass media and form the basis for the way most people (vaguely) understand what is happening.

This narrowly focussed and self-serving (mis)understanding of the crisis needs to be challenged. Projects that help communities practically need to be built and combined with the movements of protest to ensure that that the banker interests, the psychopaths who are a grave danger to the future of society, are brought to heel. During and after the crisis that they have created they will still be a danger because they will seek to move their riches into the scarce natural capital resources that societies need to protect and to manage in the interests of all. Without dealing with this group I doubt we will get very far dealing with climate change or any of the other predicaments of the 21st century.

Afterword

Having written this article raising the alarm about corporate psychopaths I came across a more nuanced view of financial service managers in a research study sponsored by the St Paul’s Institute. I don’t think there is a need to change the main argument because this article is about the people who lead the key economic and political institutions. However, the study gives a view of others who far from being “Masters of the Universe” come over to me as people who follow, feeling slightly guilty about what is happening, and what they are doing, but without the assertiveness or strength to do anything about it, pushing away their sense of unease during the partying with their colleagues…..

“about two thirds of respondents to a survey of 515 financial services managers think that financial services professionals are overpaid and about the same percentage declare that salary and bonuses are their principal motivating factor in the work environment – so a significant number must be in both camps!” … A comment on the findings of the survey by churchman Right Rev Dr Peter Selby suggests that it is difficult to engage with this group because:

“A mixture of fear for one’s own future, actual loyalty to colleagues, and the peer pressure that operates in highly demanding work situations represent significant obstacles to engagement that is effective in engendering change, rather than simply a rehearsal of faint-hearted guilt.”

Read the study (PDF document)

Saying that the people in the finance industry are greedy may often be true but it is too simplistic to be a full explanation. One way of generalising this may be to say that a highly demanding, and rather technical job, where deals are mediated through computers rather than face to face human contact, will leave you no time or energy to reflect on deeper emotional and ethical issues. Your social circle is likely to be your work network to whom you will have a strong loyalty because you know few others, and you will probably not be able to speak with others about what you do. The fear of losing work, income and your social network if you lose your job will be great, creating a strong pressure to conformity – even though you have a distant guilty feeling that all may not be well with what one is doing. That guilty feeling will then be held at bay, pushed to the margins of one’s consciousness….

We think of financial market traders behaving arrogantly as if they were “masters of the universe” – again, that may have some truth, particularly for the chief executives who lead their companies over the edge. However, what kind of personality is it that follows these leaders into the abyss? The answer is people who have no real values or ideas of their own. People who are without any kind of ethical or community compass, people who have not done their assertiveness training, who have not yet learned to say “NO”, who follow the group for fear of being outcasts, even when they know, in a held at bay part of their psyche, that they are not doing the right thing.

According to insiders experienced traders in the Royal Bank of Scotland recently made unwise derivatives based bets on sovereign debt – why, because they were bowing to group pressure – ref. http://www.ianfraser.org/st-pauls-institute-shines-a-light-on-the-city-of-londons-dark-heart/.

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Brian Davey trained as an economist but, aside for a brief spell working in eastern Germany showing how to do community development work, has spent most of his life working in the community and voluntary sector in Nottingham particularly in the health promotion, mental health and environmental fields. He helped develop Ecoworks, a community garden and environmental project for people with mental health problems. He is a member of the Feasta Energy and Climate Working Group and the Co-ordinator of Cap and Share UK. His life-long interest is why and how people and systems break down. He lives in Nottingham.

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Featured image: Putrid apple. Author: Alexander Kalina. Source: http://www.sxc.hu/photo/906047

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