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The Zombie System: How Capitalism Has Gone Off The Rails

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Authored by Michael Sauga, originally posted at Der Spiegel,

Six years after the Lehman disaster, the industrialized world is suffering from Japan Syndrome. Growth is minimal, another crash may be brewing and the gulf between rich and poor continues to widen. Can the global economy reinvent itself?

A new buzzword is circulating in the world's convention centers and auditoriums. It can be heard at the World Economic Forum in Davos, Switzerland, and at the annual meeting of the International Monetary Fund. Bankers sprinkle it into the presentations; politicians use it leave an impression on discussion panels.

The buzzword is "inclusion" and it refers to a trait that Western industrialized nations seem to be on the verge of losing: the ability to allow as many layers of society as possible to benefit from economic advancement and participate in political life.

The term is now even being used at meetings of a more exclusive character, as was the case in London in May. Some 250 wealthy and extremely wealthy individuals, from Google Chairman Eric Schmidt to Unilever CEO Paul Polman, gathered in a venerable castle on the Thames River to lament the fact that in today's capitalism, there is too little left over for the lower income classes. Former US President Bill Clinton found fault with the "uneven distribution of opportunity," while IMF Managing Director Christine Lagarde was critical of the numerous financial scandals. The hostess of the meeting, investor and bank heir Lynn Forester de Rothschild, said she was concerned about social cohesion, noting that citizens had "lost confidence in their governments."

It isn't necessary, of course, to attend the London conference on "inclusive capitalism" to realize that industrialized countries have a problem. When the Berlin Wall came down 25 years ago, the West's liberal economic and social order seemed on the verge of an unstoppable march of triumph. Communism had failed, politicians worldwide were singing the praises of deregulated markets and US political scientist Francis Fukuyama was invoking the "end of history."

Today, no one talks anymore about the beneficial effects of unimpeded capital movement. Today's issue is "secular stagnation," as former US Treasury Secretary Larry Summers puts it. The American economy isn't growing even half as quickly as did in the 1990s. Japan has become the sick man of Asia. And Europe is sinking into a recession that has begun to slow down the German export machine and threaten prosperity.

Capitalism in the 21st century is a capitalism of uncertainty, as became evident once again last week. All it took were a few disappointing US trade figures and suddenly markets plunged worldwide, from the American bond market to crude oil trading. It seemed only fitting that the turbulence also affected the bonds of the country that has long been seen as an indicator of jitters: Greece. The financial papers called it a "flash crash."

 

Running Out of Ammunition

Politicians and business leaders everywhere are now calling for new growth initiatives, but the governments' arsenals are empty. The billions spent on economic stimulus packages following the financial crisis have created mountains of debt in most industrialized countries and they now lack funds for new spending programs.

Central banks are also running out of ammunition. They have pushed interest rates close to zero and have spent hundreds of billions to buy government bonds. Yet the vast amounts of money they are pumping into the financial sector isn't making its way into the economy.

Be it in Japan, Europe or the United States, companies are hardly investing in new machinery or factories anymore. Instead, prices are exploding on the global stock, real estate and bond markets, a dangerous boom driven by cheap money, not by sustainable growth. Experts with the Bank for International Settlements have already identified "worrisome signs" of an impending crash in many areas. In addition to creating new risks, the West's crisis policy is also exacerbating conflicts in the industrialized nations themselves. While workers' wages are stagnating and traditional savings accounts are yielding almost nothing, the wealthier classes -- those that derive most of their income by allowing their money to work for them -- are profiting handsomely.

According to the latest Global Wealth Report by the Boston Consulting Group, worldwide private wealth grew by about 15 percent last year, almost twice as fast as in the 12 months previous.

The data expose a dangerous malfunction in capitalism's engine room. Banks, mutual funds and investment firms used to ensure that citizens' savings were transformed into technical advances, growth and new jobs. Today they organize the redistribution of social wealth from the bottom to the top. The middle class has also been negatively affected: For years, many average earners have seen their prosperity shrinking instead of growing.

Harvard economist Larry Katz rails that US society has come to resemble a deformed and unstable apartment building: The penthouse at the top is getting bigger and bigger, the lower levels are overcrowded, the middle levels are full of empty apartments and the elevator has stopped working.

 

'Wider and Wider'

It's no wonder, then, that people can no longer get much out of the system. According to polls by the Allensbach Institute, only one in five Germans believes economic conditions in Germany are "fair." Almost 90 percent feel that the gap between rich and poor is "getting wider and wider."

In this sense, the crisis of capitalism has turned into a crisis of democracy. Many feel that their countries are no longer being governed by parliaments and legislatures, but by bank lobbyists, which apply the logic of suicide bombers to secure their privileges: Either they are rescued or they drag the entire sector to its death.

It isn't surprising that this situation reinforces the arguments of leftist economists like distribution critic Thomas Piketty. But even market liberals have begun using terms like the "one-percent society" and "plutocracy." The chief commentator of the Financial Times, Martin Wolf, calls the unleashing of the capital markets a "pact with the devil."

They aren't alone. Even the system's insiders are filled with doubt. There is the bank analyst in New York who has become exasperated with banks; the business owner in Switzerland who is calling for higher taxes; the conservative Washington politician who has lost faith in the conservatives; and the private banker in Frankfurt who is at odds with Europe's supreme monetary authority.

They all convey a deep sense of unease, and some even show a touch of rebellion.

If there is a rock star among global bank analysts, it's Mike Mayo. The wiry financial expert loves loud ties and tightly cut suits, he can do 35 pull-ups at a time, and he likes it when people call him the "CEO killer."

The weapons Mayo takes into battle are neatly lined up in his small office on the 15th floor of a New York skyscraper: number-heavy studies about the US banking industry, some as thick as a shoebox and often so revealing that they have enraged industry giants like former Citigroup CEO Sandy Weill, or Stan O'Neal in his days as the head of Merrill Lynch. Words of praise from Mayo are met with cheers on the exchanges, but when he says sell, it can send prices tumbling.

Mayo isn't interested in a particular sector but rather the core of the Western economic system. Karl Marx called banks "the most artificial and most developed product turned out by the capitalist mode of production." For Austrian economist Joseph Schumpeter, they were guarantors of progress, which he described as "creative destruction."

But financial institutions haven't performed this function in a long time. Before the financial crisis, they were the drivers of the untenable expansion of debt that caused the crash. Now, focused as they are on repairing the damage done, they are inhibiting the recovery. The amount of credit ought to be "six times faster than it has been," says Mayo. "Banks now aren't the engines of growth anymore."

Mayo's words reflect the experience of his 25 years in the industry, a career that sometimes sounds like a plot thought up by John Grisham: the young hero faces off against a mafia-like system.

He was in his late 20s when he arrived on Wall Street, a place he saw as symbolic of both the economic and the moral superiority of capitalism. "I always had this impression," says Mayo, "that the head of a bank would be the most ethical person and upstanding citizen possible."

 

The Blackest of Boxes

But when Mayo, a lending expert, worked for well-known players like UBS and Prudential Securities, he quickly learned that the glittering facades of the American financial industry concealed an abyss of lies and corruption. Mayo met people who recommended buying shares in technology companies in which they themselves held stakes. He saw how top executives diverted funds into their own pockets during mergers. And he met a bank director who only merged his bank with a lender in Florida because he liked boating in the Keys.

What bothered Mayo most of all was that his employers penalized him for doing his job: writing critical analyses of banks. He lost his job at Lehman Brothers because he had downgraded a financial institution with which the Lehman investment department wanted to do business. Credit Suisse fired him because he recommended selling most US bank stocks.

Only when the real estate bubble burst did the industry remember the defiant banking analyst, who already saw the approaching disaster even as then-Deutsche Bank CEO Josef Ackermann issued a yield projection of 25 percent. Fortune called him "one of eight people who saw the crisis coming." The US Congress called on him to testify about the crisis.

Today Mayo writes his analyses for the Asian brokerage group CLSA and they still read like reports from a crisis zone. Central banks have kept lenders alive with low interest rates, and governments have forced them to take up additional capital and comply with thousands of pages of new regulations. Nevertheless, Mayo is convinced that "the incentives that drove the problems … are still in place today."

Top bank executives are once again making as much as they did before the crisis, even though the government had to bail out a large share of banks. The biggest major banks did not shrink, as was intended, but instead have become even larger.

 

Incalculable Risks

New accounting rules were passed, but financial managers can still hide the value of their receivables and collateral behind nebulous terms like "transaction" or "customer order." Bank balance sheets, British central banker Andrew Haldane said caustically, are still "the blackest of boxes."

Before the crash, investment banks gambled with derivatives known by acronyms like CDO and CDS. Today Wall Street institutions try to get the upper hand with high-frequency trading, with their Dark Pools and millisecond algorithms. Regulators fear that high-frequency trading, also known as flash trading, could create incalculable risks for the global financial system.

When analyst Mayo thinks about the modern banking world, he imagines a character in the Roman Polanski film "Chinatown," California detective Jake Gittes. The man solves one corruption case after another, and yet the crime level in Los Angeles doesn't go down. "Why is that?" he finally asks another character, who merely replies: "Forget it, Jake. It's Chinatown."

It's the same with the banking industry, says the analyst. Individual institutions aren't the problem, he explains. The problem is the system. "The banks are Chinatown," says Mayo, "and it is still the situation today."

The little village of Wimmis lies in an area of Switzerland that still looks quintessentially Swiss, the Bernese Oberland, or Highlands, where Swiss flags flutter in front yards. The local tanning salon is called the "Sunne Stübli" (little sun room) and under "item five" of the latest edition of the town's "Placard Ordinance," posted outside the town administration building, organizations must secure their public notices "with thumbtacks" and "not with staples." Everything has its place in Wimmis, as it does in Markus Wenger's window factory. The business owner, with his thinning hair and crafty eyes, is the embodiment of the old saying, "time is money." He walks briskly through his production building, the size of a football field, passing energy-saving transom windows, energy-saving patio doors and energy-saving skylights, which can be installed between solar panels, also to save energy, a system Wenger developed. "We constantly have to think of new things," he says, "otherwise the Czechs will overtake us."

Wenger could pass for a model businessman from the regional chamber of commerce were it not for his support for a political initiative that's about as un-Swiss as banning cheese production in the Emmental region. Wenger advocates raising the inheritance tax.

For decades, Switzerland was based on a unique form of popular capitalism, which promised small craftsmen as many benefits as those who worked in high finance. Switzerland was the discreet tax haven for the world's rich, while simultaneously laying claim to Europe's highest wage levels -- a Rolex model of the social welfare state.

But the country's established class consensus was shattered by the excesses of the financial crisis -- the $60 billion bailout of its biggest bank, UBS, and the millions in golden parachutes paid out to executives so that they wouldn't go to the competition after being jettisoned by their companies.

Since then, a hint of class struggle pervades Swiss Alpine valleys. A series of popular initiatives have been launched, initiatives the financial newspapers have labeled "anti-business." To begin with, the Swiss voted on and approved a cap on so-called "rip-off salaries." Another referendum sought to impose a ceiling on executive compensation, but it failed. A proposal by Social Democrats, Greens and the socially conservative EVP, to support government pensions with a new tax on large inheritances, will be put to a referendum soon.

 

'The Wealth of Medieval Princes'

Income isn't the problem in Switzerland, where the gap between rich and poor is no wider than in Germany or France. The problem is assets. No other country has as many major shareholders, financiers and investors, and in no country is as much capital concentrated in so few hands. The assets of the 100 wealthiest Swiss citizens have increased almost fivefold in the last 25 years. In the Canton of Zürich, the 10 richest residents own as much as the poorest 500,000. When a Swiss business owner died recently, his two heirs inherited an estate worth as much as all single-family homes and owner-occupied flats in the Canton of Appenzell Innerrhoden. Wealth has become so concentrated in Switzerland, says the former head of the Zürich statistics office, that it "rivals the wealth of medieval princes."

The government benefits hardly at all from this wealth. The Swiss tax authorities recently collected all of 864 million Swiss francs (€715 million) in inheritance tax, and this revenue source is unlikely to increase anytime soon. To attract wealthy individuals, the cantons have reduced their tax rates to such low levels that even estates worth billions can be left to the next generation without being subject to any taxation at all.

In the past, the Swiss were fond of their quirky high society, whose lives of luxury in places like Lugano were as spectacular as their bankruptcies. But now, a large share of the super-rich comes from the financial industry, and even an upright window manufacturer like Markus Wenger is often unsure what to make of the demands coming from his high-end customers.

A homeowner recently asked Wenger if he could gold-plate his window fittings. And when he was standing in an older couple's 500-square-meter (5,380-square-foot) apartment not long ago, he found himself wondering: How do they heat this?

 

A Dangerous Path

Wenger is no revolutionary. He likes the market economy and says: "Performance must be rewarded." His support for a higher inheritance tax is not as much the result of his sense of justice, but rather a cost calculation that he explains as soberly as the installation plan for his windows.

This is how Wenger's calculation works: Today he pays about €8,000 a year in social security contributions for a carpenter who makes 65,000 Swiss francs (€54,000). But the Swiss population is aging, so contributions to pension insurance threaten to increase drastically soon. Doesn't it make sense, he asks, to exact an additional, small contribution from those Swiss citizens who hardly pay any taxes at all today on their rapidly growing fortunes?

For Wenger, the answer is obvious. But he also knows that most of his fellow business owners see things differently. They are worried about an "attack by the left" and prefer to support their supposed champion, Christoph Blocher, the billionaire spiritual head of the Swiss People's Party. Only recently, Blocher convinced the Swiss to limit immigration by workers from other European countries. Now Wenger expects Blocher to launch a new campaign under the motto: "Are you trying to drive our business owners out of the country?"

There is more at stake than a few million francs for the national pension fund. The real question is whether wealthy countries like Switzerland should become playthings for their elites. Wenger sees the industrialized countries embarking on a dangerous path, the path of greed and self-indulgence, and he believes Blocher's party is the most visible expression of that. Blocher is pursuing a "policy for high finance," says Wenger. "He is fighting on behalf of money."

The entrepreneur from the Bern Highlands has no illusions over his prospects in the upcoming conflict with the country's great scaremonger. The Swiss are likely to vote on the inheritance tax initiative next year. "In the end," Wenger predicts, "the vote will be 60 to 40 against us."

 

The Deformation of Capitalism

He was the face of the Reagan revolution, a young man with large, horn-rimmed glasses and thick hair, wearing a suit that was too big for him as he sat next to the hero of conservative America. As former President Ronald Reagan's budget director, David Stockman was the architect of the biggest tax cut in US history and the propagandist of the "trickle-down" theory, the Republican tenet whereby profits earned by the rich eventually benefit the poorer classes.

Thirty years later, Stockman is sitting on a Chesterfield sofa in his enormous mansion in Greenwich, Connecticut, an affluent suburb of New York, where the stars of the hedge fund industry conceal their tasteless mansions behind red brick walls and jeeps owned by private security companies are parked on every street corner.

Stockman is wearing a green baseball cap and a black T-shirt. It's a sunny early fall morning, but the mood in the brightly lit rooms is strangely somber. The rooms are empty, there are boxes stacked in the corners and a servant is wrapping the silverware in the dining room.

Stockman is moving to New York, into an apartment he has already rented in Manhattan. But it isn't entirely clear whether he is only moving to be closer to TV studios and newspaper editors, or if the move signifies a departure from his previous life. It was a life that took him through the executive suites of Washington politics and the US financial industry, a life that has placed Stockman in an almost unparalleled position to recount the aberrations of American capitalism in the last three decades. "We have a financialized, central-bank dominated casino," he says, "that is undermining the fundamentals of a healthy growing capitalist economy," he says.

Ironically, Stockman was the one who wanted to reshape that society, back in the 1980s, when Reagan made him the organizer of his shift to so-called supply-side economics. Like the actor-turned-president from California, Stockman believed in free markets, low taxes and reducing the role of government.

 

The First Mistake

But Stockman also believed in healthy finances, which placed him at odds with the California contingent on Reagan's team who saw themselves as lobbyists for industry and the military. When Reagan's chief of staff, Donald Regan, declared the phrase "tax increase" to be taboo after the 1984 election, Stockman knew that he had lost. But it was more than a personal defeat. It was a triumph of irrationality, one that led Stockman to permanently disassociate himself from his party's fiscal policies. "The Republican concept of starving the beast is the worst thing in terms of fiscal rectitude that you can imagine," Stockman says today. "It's even worse than the Keynesian models of the Democrats."

The debt policy of the Reagan years was the first mistake of America's conservative revolutionaries, but not the only one. There is another fallacy, one that Stockman also participated in when he went to work for the investment bank Salomon Brothers and later the private equity firm Blackstone after his ouster from the White House.

It was the time when it had become politically fashionable to unfetter the financial industry; a time when then-Fed Chairman Alan Greenspan, Stockman's old acquaintance from the Reagan team, was inventing a new monetary policy: Whenever the economy and the markets showed signs of weakness, he reduced interest rates, and when a large financial institution ran into trouble, it was bailed out with the help of the central bank.

Greenspan's policy of cheap money became a sweet poison for Wall Street, the chief ingredient of the dangerous debt cocktails brewed up by the wizards at London and New York investment banks, with Stockman front and center. The former politician became a virtuoso of the leveraged buyout, a complex financial deal in which in investor buys companies with borrowed money, restructures them or carves them up, and then sells them at a profit.

The deals made Stockman rich, but they also turned him into a junkie. His projects became increasingly risky and the towers of credit he constructed became taller and taller. "I was an addict," he says. "I got caught up in the process."

 

A Debt Republic

Disaster struck in 2007, when one of his highly leveraged companies went bankrupt. He was indicted on fraud charges, and the bankruptcy cost him millions and damaged his reputation. It became his "road to Damascus experience," as he calls it, when the financial crisis erupted a short time later. He concluded that the same mistakes that had destroyed his company also took the United States to the brink of an abyss: cheap credit, excessively high debt and a false sense of security that everything would ultimately work out for the best.

Stockman again became the rebel he had been at the beginning of his career. He gave up his position in the financial industry, started a blog in which he settled scores with both policymakers in Washington and the financial oligarchy on Wall Street and he wrote an almost 800-page analysis of the "Great Deformation" of US capitalism.

The conservative is furious over his country's transformation into a debt republic of the sort the Western world has never before seen in times of peace. A republic in which going to college is paid for with borrowed funds, as is the next military campaign. A country which hasn't actually dismantled its gigantic pile of debt since the crisis -- $60 trillion -- but has merely redistributed it. While the banks were allowed to pass on a large share of their bad loans to taxpayers, the government is in more debt than ever before.

The mountain of debt appears smaller than it is because the Fed keeps interest rates low. At the same time, though, all this cheap money is driving the United States into a risky race against time, one in which no one knows what will happen first: the hoped-for economic boom or the next crash. Experts, like former Treasury Secretary Robert Rubin, believe the current rally in the markets is in fact the precursor to the next crash.

The primary beneficiaries of the market rally seen in recent months are the 10 percent of top earners who own more than 90 percent of financial assets. But for average Americans, the policies instituted in response to the crisis have been poverty inducing. After the crash, millions of US citizens first lost their homes and then their jobs -- and now the social divide in the country is as big as it was in the 1920s. While wealth has grown at the top of the income scale, the median household, or the household that lies statistically at the exact middle of the scale, has become $50,000 poorer since 2007.

In the past, part of the promise of the American dream was that anyone who worked hard enough could eventually improve his or her situation. Today the wealthy enjoy most of the fruits of US capitalism and the most salient feature of the system is the fear of fear. No one knows what might happen if the Fed raises interest rates next year as planned. Will pressure from rising costs cause the government deficit to explode? Will the stock market bubble burst and will financial institutions collapse? Will the economy crash?

Only one thing is certain: In the seventh year of the financial crisis, the US economy is still addicted to debt and cheap money. Worst of all, the withdrawal phase hasn't even begun.

"There is no possibility of a soft landing (with the) markets as completely distorted and disabled as they are today," Stockman says in parting. "There will be some great conflagration. It's just the question of when."

Michael Klaus flips open his mobile phone, which he has been doing a lot of these days. He taps the screen with his finger to display the current yields on 10-year German government bonds. "Germany 10 Year: 0.80," the screen reads, using the abbreviated terminology of the Bloomberg market service. "You see," he says, "yields are down again. They were at 0.84 yesterday."

It's Wednesday of last week. The Frankfurt banker is walking down Friedrichstrasse in Berlin on his way to a meeting with fellow members of the Confederation of German Employers' Associations. The latest labor agreement is on the agenda, but Klaus is still thinking about the number on the screen of his mobile phone, yet another reaction to the most recent plans of Mario Draghi, the president of the European Central Bank (ECB).

Such rates are almost always a reaction to Draghi, at least they have been since the euro crisis got going. According to economics textbooks, security prices are determined by supply and demand. But in the reality of the monetary union, they usually follow the rates set by the top monetary watchdog in Frankfurt. In Klaus's assessment of the situation, "to put it in somewhat exaggerated terms, we live in a central-bank-administration economy."

 

The ECB's Contribution

For the last quarter of a century, Klaus, a management expert, has been working for Metzler, a traditional, private bank based in Frankfurt. He is now a partner and exudes the self-confident nonchalance of a man who knows that his customers need to show up with at least €3 million to become his clients. His biggest asset is reliability. Unlike the large, powerful banks, his bank would be unable to count on government assistance in a crisis. It is not big enough to be too big to fail.

Partly for that reason, Klaus is particularly bothered by the ECB's development in recent years. He sees it as a kind of hedge fund a kind of ministerial administration. Because Europe's major banks are ailing and national governments are at odds, the ECB has developed into the most powerful bureaucracy on the Continent. It controls interest rates and the money supply, drives prices on the exchanges and financial markets, supervises financial institutions and audits governments. According to Klaus, the European Central Bank has all but "replaced" the European bond market.

It made sense at the time, because it protected the monetary union from breaking apart. But now emergency aid has turned into long-term assistance. The effects of ECB measures are subsiding, and financial experts aren't the only ones to notice that their programs have recently done more harm than good.

That was the case with Draghi's latest package last month. To stimulate lending to small and mid-sized companies, the ECB announced its intention to begin large-scale buying of special debt instruments known as asset-backed securities, or ABS. The only problem is that far too few of these securities exist in Europe.

This leads many experts to worry that lenders will simply fill the gap by transforming bad debt from their portfolios into ABSs and pass them on to the ECB. The investment effect would be next to nothing.

Draghi's plan to provide long-term funds to banks if they can demonstrate that they passed it on in the form of loans to companies or households could also prove harmful. They must only offer proof in 2016, meaning they could first invest the money in government bonds, a surer bet these days than corporate bonds.

 

Achieving the Opposite

Another recent Draghi measure is particularly dangerous: the "negative deposit interest rate." It means that banks no longer earn anything when they park their money with the ECB. On the contrary, they are required to pay for the privilege.

This too is meant to encourage banks to lend. In reality, however, the measure makes the situation even more difficult for financial institutions like savings banks and cooperative banks, which are dependent on customer deposits. Because of the current low interest rates, these banks already earn almost nothing from the spread between savings and lending rates. If interest rates are pushed down even further, profits will continue to decline. "Ironically, this torpedoes the business model of savings banks and cooperative banks, which have thus far managed to survive the crisis in relatively good shape," says Klaus.

Many experts are worried that with measures like these, the ECB is achieving precisely the opposite of what it wants to achieve. Instead of being strengthened, the credit sector is weakened. Instead of reducing risks, new ones are being created. Instead of liquidating ailing banks, they are kept alive artificially.

The economy has had little experience thus far with the new crisis capitalism, with its miniature growth, miniature inflation and miniature interest rates. But economists learned one thing after large credit bubbles burst in recent years, in Japan and Scandinavia, for example: After a financial and banking crisis, the first order of business is to clean up the banks, and to do it quickly and radically. Institutions that are not viable need to be shut down while the others should be provided with capital.

 

'Substantial Turbulence'

In Europe, however, this process has dragged on for years, under pressure from the financial lobby. The condition of the industry is now so dismal that experts are using metaphors from the world of horror films to describe it. "Zombie banks" are those that are being kept alive artificially with government bailouts and, like the zombies in Hollywood films, are wreaking havoc throughout Europe. They are too sick to lend money to the real economy but healthy enough to speculate with financial investments. Many banks today, says Bonn economist Martin Hellwig, can only "survive in the market by speculating."

What distinguishes the current situation from the wild years before the financial crisis is that speculators were once driven by greed but have since turned into speculators motivated by need.

Private banker Klaus has seen enough on his market app. He closes the phone with a worried look on his face, and then he utters a sentence in the typically convoluted idiom of the financial industry: "If Europe slips into a recession, it could lead to substantial turbulence in the financial markets."

The man who introduced the concept of "inclusion" into the political debate is sitting in his office in Boston. There are mountains of papers on the round conference table: academic papers, pages of statistics from the International Monetary Fund, and the latest issue of the Anarcho-Syndicalist Review.

Daron Acemoglu is currently considered one of the 10 most influential economists in the world, but the native of Istanbul doesn't think much of titles and formalities. He prefers the relaxed look of the web community: a plaid shirt and jeans, and a Starbucks cup in his hand.

He became famous two years ago when he and colleague James Robinson published a deeply researched study on the rise of Western industrial societies. Their central thesis was that the key to their success was not climate or religion, but the development of social institutions that included as many citizens as possible: a market economy that encourages progress and entrepreneurship, and a parliamentary democracy that serves to balance interests.

The only problem is that such institutions do not arise automatically. They have to be promoted and defended, especially against those social classes and interest groups that use power to seal themselves off from competitors, secure their own benefits and seek to influence lawmakers accordingly.

Extremely well read, Acemoglu can cite dozens of such cases. One is 14th century Venice, where a small patrician caste monopolized maritime trade. Another is Egypt under former President Hosni Mubarak, whose officer friends divided up key economic posts among themselves but were complete failures as businessmen. These are what Acemoglu calls "extractive processes," which lead to economic and social decline.

 

A Process of Extraction?

The question today is: Are Western industrial societies currently undergoing a similar process of extraction?

Acemoglu leans back in his chair. He isn't one to make snap judgments, and he understands the contradictions of social trends, in the United States, for example. On the one hand, the US is more inclusive today than in the 1960s, because it has abolished racial segregation. On the other hand, says Acemoglu, he has noticed the growing influence of powerful interest groups: the pharmaceutical industry, insurance companies and, most of all, Wall Street. "The problem of money in politics," says Acemoglu, "is particularly acute in the case of the financial industry."

US politicians spend up to 70 percent of their time raising money for their campaigns, and Wall Street is one of their most important sources. Experts have calculated that Bill and Hillary Clinton alone have garnered at least $300 million in donations from the financial industry since the early 1990s.

In addition, money is no longer the only factor shaping the connections between Wall Street and Washington, as Acemoglu demonstrated in a recent study about former US Treasury Secretary Timothy Geithner. The stock prices of financial firms, with which he maintained close relationships, climbed significantly after his nomination. "The fact that some companies had the ear of the Secretary of the Treasury," Acemoglu concludes, "was, at least by the market view, very valuable."

It has nothing to do with bribery, Acemoglu clarifies. Still, the process highlights the dangerous closeness between the financial industry and the political world, a phenomenon which can be seen elsewhere in the world as well. In Germany, for example, Chancellor Angela Merkel took steps to prevent a Greek insolvency at least partly out of consideration for German banks invested there. The London financial industry, to cite another example, was instrumental in blocking EU plans for the introduction of a financial transaction tax. In Switzerland, billionaire Blocher finances referendum campaigns via his political party. "The rich are extremely powerful," Acemoglu says, "and that is a concern."

 

Not Enough

Limiting that influence is of the utmost importance, Acemoglu believes, so that today's upper-class, high-finance capitalism can once again revert to being a capitalism of the real economy and the societal center. The necessary economic reforms are not Acemoglu's primary focus, even if the relevant proposals have existed for a long time: a fiscal policy that doesn't just benefit the rich; a monetary policy that knows its limits; a reform of the financial and banking industry that separates the traditional savings and lending business from risky investment banking.

That won't be enough, Acemoglu believes. What is needed, he argues, is a new political alliance that takes a stand against the power of the financial industry and its lobby. He sees the anti-trust movement from the beginning of the last century in the United States as a model. It was a broad coalition from the center of society and finally achieved its great victory after decades of struggle: the breakup of major corporations like Standard Oil.

Will something comparable happen with the big international banks? Acemoglu doesn't know, but he is convinced of one thing: Elitist conferences, at which bankers and fiscal policy experts hold sophisticated conversations about "inclusion," will not bring about change.

The organizers of the World Economic Forum once again sent him an invitation to Davos recently. But Acemoglu declined, as he has done several times in the past. "Solutions to the world's problems are not produced in a meeting between Bill Gates and George Soros," he says. "Renewal has to come from below."

 

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Sun, 11/02/2014 - 23:04 | 5405616 Richard Chesler
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Jews

Sun, 11/02/2014 - 23:08 | 5405622 FreeShitter
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+ NWO

Sun, 11/02/2014 - 23:29 | 5405660 SofaPapa
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"Solutions to the world's problems are not produced in a meeting between Bill Gates and George Soros," he says. "Renewal has to come from below."

Revolutions can be peaceful or violent, but the sentiment stated in this quote is correct, and it represents a revolution, one way or another.

Mon, 11/03/2014 - 00:13 | 5405745 Anusocracy
Anusocracy's picture

Of course it must come from below. Seeking order from above only creates increased chaos. Free markets work better for the simple fact that the dead hand of Soviet America's government is absent.

“Chaos is found in greatest abundance wherever order is being sought. It always defeats order, because it is better organized.”

- Terry Pratchett

Mon, 11/03/2014 - 08:06 | 5406151 boogerbently
boogerbently's picture

"What is needed, he argues, is a new political alliance that takes a stand against the power of the financial industry and its lobby."

In other words, it ain't happening !


Mon, 11/03/2014 - 11:09 | 5406661 Woodyg
Woodyg's picture

Yea and these fascist bastards aren't Capitalists -
They are FAsCISTS!
Using their illgotten gains to capture the governing system where they then siphon off more and more -
Simply look at average wages vs Productivity -
I argue when the charts diverge the fascists Captured the system lock stock and 2 smoking barrels -
Of course I blame Nixon for destroyingthe gold standard and opening China -
And I believe we did hang a bunch of these facists after WW2 - (but brought many of them an thier hidden $to America where the dark money has been used for the alphabet agencies to use as they saw fit)-
We need a new HUEY LONG -
Someone not afraid to take on the system -
I know I know they killed the sob but we still need the new politicin that will stand up and say
Every Man A King -
And take on these fascist bastards that have Captured the system and then change the laws to benefit them at the expense of everyone and the environment -

Mon, 11/03/2014 - 04:05 | 5406000 Kirk2NCC1701
Kirk2NCC1701's picture

The thing about Top-down solutions is that they work really well. For the Top.
For the Bottom... not so much.

The Top likes to give it catchy phrases "Trickle-down". In reality, by the time anything gets to the Bottom, it's becomes "Trickled-On".

Predictable like human nature, and the rhyme of history.

Mon, 11/03/2014 - 08:59 | 5406234 CuttingEdge
CuttingEdge's picture

More like pissed on than trickled on, Kirk.

Mon, 11/03/2014 - 01:02 | 5405830 Fuku Ben
Fuku Ben's picture

You're both warm. While they are both servants of satan they are not the one's from below that Daron is referencing when he says "Renewal has to come from below." He most certainly is not talking about changes being made by the masses he calls Human Capital.

Renewal comes from what escapes by opening up the gates to the pit of hell and the chaos that will ensue

https://www.youtube.com/watch?v=uU6U-8LP1DY

How many professors are repeatedly rejecting offers from billionaires to assist their plans for global domination? With the egos of billionaires this would result in career suicide or an actual suicide depending on how you told them to piss off. And why do they repeatedly pursue this guy?

That is unless his role of mild mannered professor is a cover for someone with a major amount of power in the hierarchy

One of Daron's areas of interest is Human Capital. That alone should give you insight into his mindset of how he views humans. And quite possibly more on his actual role here in Shangri La.

Sun, 11/02/2014 - 23:44 | 5405685 junction
junction's picture

Crybaby.  Just because you can't do 35 pull-ups and don't have a mansion in Greenwich.  A long posting about thieves in business suits who for personal profit have wrecked the world's economy.

Mon, 11/03/2014 - 01:39 | 5405893 Socratic Dog
Socratic Dog's picture

Agree.  What about the guy who laments that "The government benefits hardly at all from this wealth".  Jesus.  Newsflash:  government is the problem!  Stockman thinks it was a mistake to try to starve the beast.  Sure, if you let it go into endless debt to make up for the lack of funding, it's a problem.  Balanced budget plus lower tax revenue=starved beast.  Starved beast loses weight.  Sounds good to me.

Ron Paul wrote in one of his books that returning the US to the government spending of Clinton's era would allow the elimination of the income tax and a balanced budget.  Reading that was a "hmmm" moment for me.  What about if we shrank it to Kennedy's government?

Should'a listened to Ike and his MIC speech.  Shame he left it until he was walking out the door.

Mon, 11/03/2014 - 11:37 | 5406762 ucde
ucde's picture

Free market vs planned debate is a wash. All successful economies of the past have been mixed, and the largest crimes of the last 20 years were committed under 'free-market' pro-oligarch regimes. (The looting of Russia in the 90s, the asset bubbles and bailouts in America in the 00s, privatization of public resources in South and Central America 1980s to today). The government gets smaller when it deregulates and ceases enforcing its laws, but this is definitely not what we want. We want government to regulate finance!

I strongly disagree with the analysis that points the finger at government inefficiency as the causa prima of our economic malaise, when private debt and the resulting oligarchic concentration of wealth is the elephant-in-the-room. Its a red herring to think that slashing benefits programs and cutting government spending are going to do anything positive to free us from the debt-cartel which holds the world in private debt bondage. While they are allowed to create loans they will just step in and make us that much more indebted for not having government deficits. "Austerity" -- e.g. fiscal/monetary discipline in the name of repayment of predatory debts -- is not going to work, in my view. We do not need 'discipline' in the name of debt-morality or debt-service! We need to pass on the losses for unpayable debts to creditors, and let them enjoy 'free market discipline'!

Mon, 11/03/2014 - 23:52 | 5409439 Socratic Dog
Socratic Dog's picture

Umm, there's a pretty simple way to solve that problem.  Eliminate ursury.  The resulting system might actually be sustainable, rather than dependent on exponential growth.

It would have the side effect, intended or unintended, of separating a certain ethnic group from its power and control.  Win-win.

It would also be incompliance with new testament teachings, if that's worth anything to you.

Mon, 11/03/2014 - 07:55 | 5406138 mvsjcl
mvsjcl's picture

35? Pfffft! I did 40 to max the PFT, and could do twice that.

Mon, 11/03/2014 - 15:38 | 5407692 Pickleton
Pickleton's picture

PFT max was/is 20. 

Mon, 11/03/2014 - 02:16 | 5405930 Bloppy
Bloppy's picture

It's sad because young people now have no experience with real capitalism, which DOES work. What we have today is crooked crony "capitalism" and no distinction is being made between the two.

 

Also: unhinged California- man beaten by one of those peaceful progressives for wearing a Fox News costume on Halloween

http://tinyurl.com/n7a7v39

Mon, 11/03/2014 - 03:00 | 5405970 Socrates
Socrates's picture

The problem is with assholes named, or like, Richard Chester and the maggots who support his beliefs.

Nice to see ZH could be located in Vienna where Jew hatred is extreme. Nice job Tyler.

Mon, 11/03/2014 - 15:36 | 5407688 Pickleton
Pickleton's picture

Jews

 

Idiot.

Sun, 11/02/2014 - 23:08 | 5405624 TeamDepends
TeamDepends's picture

Remember, you must stab them through the brain or they will keep coming.

Sun, 11/02/2014 - 23:12 | 5405635 adr
adr's picture

Um, government is the problem not the solution.

And the pursuit of the elimination of failure only guarantees one to fail.

 

When the rich begin to talk about the problem of the unfair distribution of wealth it is only because their schemes to increase their own wealth are no longer working. The wealthy shot their last bullet. The final move is always printing more wealth. What has always happened after that move has never been good for those in power.

All of this is talk on how to placate the masses and prevent revolution. All it will take to crash the system is for a couple of high profile bankers to be executed rightfully in broad daylight by what is left of the free people. I vote for Blankfein. You can utter such a great line as your cut off his head, "We're just doing God's work."

Sun, 11/02/2014 - 23:13 | 5405636 Bangalore Equit...
Bangalore Equity Trader's picture

Listen Zero's.

Tomorrow I will shower!

Sun, 11/02/2014 - 23:25 | 5405657 Uber Vandal
Uber Vandal's picture

I understand the power grid supplying power from India to Bangladesh failed, and the entire grid in Bangladesh was down.

http://www.cnn.com/2014/11/02/world/asia/bangladesh-nationwide-power-cut/

Mon, 11/03/2014 - 04:11 | 5406003 Kirk2NCC1701
Kirk2NCC1701's picture

They are just Preppers: 40% are off the grid, according to the article. /s

Sun, 11/02/2014 - 23:13 | 5405637 Catullus
Catullus's picture

That won't be enough, Acemoglu believes. What is needed, he argues, is a new political alliance that takes a stand against the power of the financial industry and its lobby. He sees the anti-trust movement from the beginning of the last century in the United States as a model. It was a broad coalition from the center of society and finally achieved its great victory after decades of struggle: the breakup of major corporations like Standard Oil.

Hahahah. Hahahah. Hahahahahah.

Goddamnit these people believe every myth.

Don't tell them business elites championed anti-trust and the ICC at the time as a way to "manage competition". I love when they eat this shit up and somehow blame capitalism. They blamed capitalism for the collapse in 2008. Now they're blaming capitalism for the response.

Mon, 11/03/2014 - 09:08 | 5406252 A Nanny Moose
A Nanny Moose's picture

Seriously. What we have now is not even close to Capitalism. It is rather, the natural result/progression of government. There is nothing new here, yet people never learn, and continue to ask for more government.

/facepalm

Mon, 11/03/2014 - 12:26 | 5406413 RaceToTheBottom
RaceToTheBottom's picture

The problem is the argument to Ms Obamaphone become difficult when we routinely let every Financial criminal off and then bitch about Ms Obamaphone's Obamaphone.

I say take them all down and leave some of the bodies on stakes to remind the rest to act like humans.

We tried being nice and we got fucked.  Now we should try not being nice.

Sun, 11/02/2014 - 23:16 | 5405642 Salzburg1756
Salzburg1756's picture

The yidocracy has won battle after battle, but the war is not over. Fight on:

http://www.theoccidentalobserver.net/

Sun, 11/02/2014 - 23:20 | 5405647 Eeyores Enigma
Eeyores Enigma's picture

BS!!! This tripe is just the same old tripe. 

Oh!  all we need to do is get back to real growth, honest growth, growth where everyone has a chance of putting several dozen ever increasing numbers of rubes in layers under them to keep the pyramid growing. B-f#*King-S.

Mon, 11/03/2014 - 00:21 | 5405757 lakecity55
lakecity55's picture

It's long, but "The Rise and Fall of the Roman Empire" sums it up.

We are headed into the "Fall" cycle.

Actually, if someone had written "Rise and Fall of the Persian Empire," it would be the same. Just add your favorite Empire.

Mon, 11/03/2014 - 02:53 | 5405941 DeusHedge
DeusHedge's picture

yeah, only a little while before the poor people "invade". (take our jobs) not "poor" people.

Mon, 11/03/2014 - 05:04 | 5406032 css1971
css1971's picture

Maybe you are just moving from the "republic" stage to the "emperor" stage.

Sun, 11/02/2014 - 23:23 | 5405651 techstrategy
techstrategy's picture

Change comes from the bottom up.   If people start voting their values with their wallets -- liquidate all float scams and invest in private companies,  the system will respond. 

Sun, 11/02/2014 - 23:36 | 5405670 petkovplamen
petkovplamen's picture

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.” ~John Maynard Keynes

Pure free-market Capitalism has only exited in the minds a of a few professional liars whose job was the convinnce everyone else Capitalims was the best/most efficient system for moving and providong goods and services. It is as much fantasy as pure Communism is. Nether has ever exited. The only way for Capitalims to make profit is to explit somebody or something, be it cheap labor os to get some resource such as oil, gas, timber for next to nothing. WOuld USA been abe to make so much profit without slavery or without gobbling up all those free land and resources? Stop with the lies.

Mon, 11/03/2014 - 15:45 | 5407734 Pickleton
Pickleton's picture

You seem to have a fundamental misunderstanding of what capitalism is, hence your left-wing talking point foaming at the mouth description of it. 

Sun, 11/02/2014 - 23:36 | 5405671 I Write Code
I Write Code's picture

"inclusion", hmm?  how nice of them.  guess it's rich guys planting the corn and assembling those iphones.

Sun, 11/02/2014 - 23:39 | 5405674 starman
starman's picture

Can somebody sum this up?  Way to much shit to read on a Sunday night. 

Sun, 11/02/2014 - 23:47 | 5405692 Dre4dwolf
Dre4dwolf's picture

Same usual Garbage.

Mon, 11/03/2014 - 08:17 | 5406163 boogerbently
boogerbently's picture

"What is needed, he argues, is a new political alliance that takes a stand against the power of the financial industry and its lobby. "

Mon, 11/03/2014 - 00:16 | 5405749 lakecity55
lakecity55's picture

Things got way moar corrupt.

People (citizen-voters) got complacent, and the politicians and bankers went to town.

Mon, 11/03/2014 - 00:23 | 5405761 r00t61
r00t61's picture

What piece is ostensibly saying:

"Current capitalism is unfair.  Need government to make it moar fairer for everyone again."

What piece is really saying:

"Increasing numbers of serfs are recognizing that the iron triangle of banks/corporations/lobbyists/government is nothing more than institutionalized Mafia Protection Scheme.  Need to confuse serfs with meandering 6,100 word essay so that theft can continue."

Mon, 11/03/2014 - 02:00 | 5405913 livefreediefree
livefreediefree's picture

Yes, sir. Any article coming from Der Spiegel is almost as suspect as any article coming from The Economist.

Mon, 11/03/2014 - 04:04 | 5405999 August
August's picture

>>>Can somebody sum this up?  Way to much shit to read on a Sunday night.

The ueber-wealthy are seeking social stability, for the good of all.

Let's all give 'em a hand!

Sun, 11/02/2014 - 23:40 | 5405677 taggaroonie
taggaroonie's picture

"Inclusive capatilism", the next gag-reflex inducer.

Sun, 11/02/2014 - 23:48 | 5405690 lasvegaspersona
lasvegaspersona's picture

Another Stinketty Picketty

If the problem is the system...they why blame the banks?

Truly the probem is the system. A system in which the currency is held to be a fine way to save over long periods of time begs for problems. Currencies (fiat) always become inflated. In the end  savers always suffer. This leads to calls from saver to 'tighten up the money'. On the other side the debtors cry 'make our lives and debts easier'..loosen up, print more.

Always it is that the printer prints more and ruins the currency. Savers are crushed, especially those on fixed income. In the end the tremendous debt brings down the system and everyone holding the currency loses.

We seem to be headed for a system with purely transactional currencies. Savers will look elsewhere (hint gold) as the best way to save in the long run. 

In such a system the printer can print but if excesses build up the savers and their gold can opt out and buy back in when they need to.

Socialism is as much to blame as bankers. Governments do the spending and when ever the central bankers hint at 'fiscal restraint' they are ignored.

I'm sure there are a ton of bankers whose ethics are dubious. To blame bankers is little more than the easy out for a poorly designed system. Bretton Woods was hobbled together in 3 weeks. Nixon killed it in a 10 minute speech. What remains is the dregs of those events. 

It is time to redo things. The only way that can happen is the cleansing fire of hyperinflation.

I think the Japanese just lit it.

Mon, 11/03/2014 - 05:00 | 5406031 css1971
css1971's picture

Silvio Gesell.

Sun, 11/02/2014 - 23:57 | 5405712 Shad_ow
Shad_ow's picture

We have not seen capitalism for some time in this country or, for that matter, in the world.  The sytem has been so corrupted and compromised by tyrants and theives who call themselves bankers and politicians, it is impossible to define it as a financial system.  It is a crime syndicate, benefitting only those connected or those who have their lips firmly planted on the lower boody portions of those who are connected to power.

Mon, 11/03/2014 - 00:03 | 5405726 highly debtful
highly debtful's picture

Let's keep it simple here. The key problem is way too much debt. Individuals were the first casualties. Then the banks got overwhelmed by it (through their own greed, hubris and complete lack of common sense and moral standards). So they needed to be saved by sovereign nations, who accumulated so much more debt and liabilities in the process that it was up to the central banks to step in and keep the sovereigns in business. But the BOJ's recent decision to hoover up virtually all Japanese bonds on the market seem to indicate that the CB's are also running out of sustainable ideas. 

Next stop: general loss of confidence in the entire system (unless the BIS could be of some assistance to humanity?).

So let me get this straight, TPTB have ruined our capitalist system because they never wanted to allow for any pain to cleanse the system and we are currently in the final phase where Central Banks are now so panic-stricken that they are willing to monetize the whole kit and caboodle. 

Is it just me or do we really have to conclude that the good old days are finally fading away in the rear view mirror, fast? 

Mon, 11/03/2014 - 04:59 | 5406029 css1971
css1971's picture

Do you know why there is so much debt?

Mon, 11/03/2014 - 09:05 | 5406247 highly debtful
highly debtful's picture

I said "let's keep it simple here". With a question like that you're pulling me out of my comfort zone. 

Mon, 11/03/2014 - 12:32 | 5406973 ucde
ucde's picture

"Do you know why there is so much debt?"

The Financialization of the Economy:  (as best I can tell the story right now):

Beginning sometime around the 50s or 60s, banks in the US began loaning out larger and larger amounts of money to everyone. Among the wealthy top 1% a certain kind of scam developed, whereby you could take on a tremendous loan, and use it to purchase real estate, or a company. This had the downside that you would go into debt to the bank, but the upside that you suddenly owned a huge property, or a productive company! Interest could be paid via rents if you bought real estate, and via profits and/or asset stripping (cue 80's/90's/00s corporate raiders/downsizers/offshoring experts.) if you bought a company. The price of real estate and the value of a company became "How much bank-money am I willing to borrow and pay for this?", with the person who would borrow most generally winning out.

A subset within the 1% began to use bank loans as ways of conquering the market. These adventurous capitalists were heavily indebted to the banks, but were able to win enough money back out of their newly purchased assets to still make fortune's for themselves. The price of real estate, and company valuations (e.g. stock prices) continued to rise, because the bank would always lend more; so in effect the banks were financing the conquest of the market by "entrepreneuers" who would use bank money to buy up assets. 

Next up, finance wonks invented ways of speculating on and making money off of the movements of asset prices. This allowed for complex and sophisticated markets to develop, a la 'casino capitalism', where people could bet large sums of money on the movements of asset prices (packaged in bundles referred to as 'derivatives'). The banks bought and sold these shitty, meaningless bets to one another to the tune of many trillions, possibly 44 trillions. These "assets" represent bets on whether the value of an asset goes up or down. (It can be more complicated, but most of them are bets on interest rate movements). The reason for the proliferation of these instruments was because banks were able to profit off of handling fees to create them, and also because derivatives allow debt to be re-packaged into some sort of zombie gambling commodity. Suddenly loans outstanding have a 'second life', where they can be bundled, securitized, and sold out -- and then bet on. You can sell your shittiest debt to a client who thinks they're buying something worthwhile -- *and* you can then take out a 10 million dollar derivatives contract betting that the loans will not be repaid, or betting that the value of the loans will decrease. You just unloaded your books of an overvalued asset, and made an almost risk free 10-million dollar bet. Its this sort of thing people are talking about when they talk about 'toxic assets'. 

In creating these asset classes, the banks tied themselves forever to the rising tide of asset prices. Massive overleveraging (multiplication of paper claims on wealth above the actual existing wealth itself), means that a 10% decline in the price of an asset (lets say its Real Estate loans/debt) could have 10 times the impact of its normal loss, because the bank in question allowed itself to act as if it had 10 times the assets that it actually possessed. So a 10% decline in an asset thats leveraged 10-to-1 is.... a 100% decline in the value of that asset! Its like making a bunch of promises above and beyond what you can actually do, and then someone calls you out on it, and by virtue of being overextended, you can actually do far less than you would normally be able to had you not made the promises.

So I just described how a whole asset class - derivatives - exists within the banking institutions in the US (and abroad), and that it depends on perpetual upward movement in real estate prices and stock market prices, and low interest rates. These are both the collateral on which derivatives are based, and the thing whose price people are gambling on. Rising interest rates, falling stock prices, and falling real estate prices cause these 'bets on the movement of prices' to go sour, because of failing collateral, leaving the banks with trillions in losses. Even by their massively disingenuous accounting standards, they would have to admit, if this happened, that they were insolvent. No real way to paper over a mission 10 trillion dollars, for example. QE and bailouts essentially exist to stop this ever from happening. 

Also, as a parallel development to all this, banks have been working for 20 years to find ways of increasing their lending to people in all different situations and walks of life. They were able to create the student loan, mortgage loan and auto loan bubbles, where the prices of education, homes and cars got bid up so high that it was only possible to pay for these things "with bank money".

On the international stage, banks have been making predatory private loans to governments and countries, and then collecting on them with government-CIA help and military forces, for the last four or five decades. The IMF is the principle agent provocateur for this adventure, and this is one reason why South America is so impoverished. They have done the same in Russia, parts of Asia and are now trying to do it in Greece. So the banks of the developed world have been using debt slavery to control the undeveloped world for the last 40 years, meaning that the entire 'Third world' is now more or less completely indebted to Northern Hemisphere banking institutions beyond all possible hope of repayment. 

And at last this game has proceeded to where we, the well-to-do white folk, are going to be the next to be robbed.

As a consequence of these events, we now live in a situation where its only possible to pay for the necessities of life (car, home, education) "with bank money". And the banks themselves play their own games the hardest of all, so they can only succeed "with bank money"-- e.g. from bigger banks. And in 2008 the biggest banks of all came out and declared that they can only succeed "with government money". The world is crushed beneath a pyramid of debt owed to the 1%, and the response of the 1% is: This must be paid back, regardless of the consequences.

Mon, 11/03/2014 - 00:10 | 5405737 q99x2
q99x2's picture

Can the global economy reinvent itself?

I think so. Prosecuting top bankers for teason or some other crime that lands them in prison for life would be the way to start because it would send the message. The filth of their crimes should be available via NSA. You would only have to do two: Jamie Dimon and Loyd Blankfein and all the rest would begin changes out of necessity. Then slowy convert the entire global financial system to an open source publicly owned and operated utility. Then begin working on the restoration of law and order and the replacement of politicians with open source software and referendum.


Mon, 11/03/2014 - 16:39 | 5408084 SofaPapa
SofaPapa's picture

As long as TPTB control the media, this will never even be discussed, not to mention acted upon.

Mon, 11/03/2014 - 00:13 | 5405743 Dragon HAwk
Dragon HAwk's picture

All Money is created by issuing debt, that means if all debts were repaid there would be no money on the Planet..

  Until they  find an Honest and fair way of creating money, that doesn't have to be repaid,  we will be in this Mess..

Mon, 11/03/2014 - 04:58 | 5406027 css1971
css1971's picture

Please don't conflate America with the rest of the world. Other people already know what money is and how to create it.

or put another way. Not all money is created by issuing debt.

Mon, 11/03/2014 - 10:27 | 5406485 redd_green
redd_green's picture

Other people?

Mon, 11/03/2014 - 00:13 | 5405746 ebworthen
ebworthen's picture

"Capitalism" in the 21st century is parasitism.

Mon, 11/03/2014 - 10:27 | 5406486 redd_green
redd_green's picture

Its the lack of real capitalism, genuine competition, that is the problem.

Mon, 11/03/2014 - 00:26 | 5405764 NoWayJose
NoWayJose's picture

Any meeting with Gates is not about capitalism - but rather about how to use predatory practices to eliminate or buyout competing companies that have products that are either cheaper or better than Gates'.

Mon, 11/03/2014 - 00:34 | 5405791 zerohedgejjxxzz12
zerohedgejjxxzz12's picture

The problem with Canabalism is that sooner or later you run out of people to eat 

Mon, 11/03/2014 - 00:38 | 5405793 gswifty
gswifty's picture

The past six years have shown that the books can be cooked enron-style for far longer than anyone imagined. But the chickens have come home to roost and it's time to serve 'em up. All the posturing and 'inclusion' by the deciders can't forestall the inevitable much longer. Karl Rove's quote comes to mind:

 

“We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality — judiciously, as you will — we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”

 

....can't fake the funk much longer.

Mon, 11/03/2014 - 00:49 | 5405813 Miffed Microbio...
Miffed Microbiologist's picture

Hmmm. I wonder if bankster and elites taste like chicken. Probably not. Soros would be anything but flavorful.

Arrogant Carl Rove. He never created Reality, only lies and more lies. His only advantage is many believe his lies and are fooled. But some do not. Perhaps someday those few will show him a new kind of reality he never fathomed could exist.

Miffed

Mon, 11/03/2014 - 04:56 | 5406025 css1971
css1971's picture

bacon

Mon, 11/03/2014 - 00:56 | 5405822 jack stephan
jack stephan's picture

I don't care I'm stupid, after hearing para types, hunters coffe folks that need decaf, wanting to hide in small space waiting to ambush flunkie Pisa cartel hood getting taken for all the loot. Dummies think white folks forgot Spanish, usually always pinche this and that. The term is called "rip crew" it will come up in conversation soon. It's cat and mouse for real out there in the dark.

http://www.youtube.com/watch?v=PwXai-sgM-s&sns=em

Mon, 11/03/2014 - 01:13 | 5405844 anachronism
anachronism's picture

How can anyone invest in a business in a country where globalized regulations allow competition from foreign-based competitors to undercut domestic businesses? By the way, almost all "US" corporations are using foreign operations to meet demand for goods and services in the United States. To varying degrees this is true in all of the "G-7" countries today (G-7 =USA, Japan, Germany, UK, France, Italy, Canada).

So, if the risk is too high to invest in productive businesses within these countries, where else could capitalists invest their money?  Answer: first into those countries where they are able to exploit the arbitrage in the cost of labor, land, and resoucres that these countries offer; And ultimately into the monetization of luxury/financial assets as they become scarce or desireable.

Finally, why invest equity capital when there is so much debt financing available to those who can capitalize on globalization? The capitalists can own land, stocks, bonds, fine art and antiques, jewlry etc. with cash generated from financial intermediation, and finance their business investments with borrowed money at less than 3% often secured only by the inflated balance sheets of the businesses themselves..

Incidentally, the current global crises were foretold in geat detail by dozens of esteemed business leaders in the early 1990s. Sir James Goldsmith made it a personal crusade in the late '80s through mid '90s to inform the public and the leaders of America and European nations about the folly of Globalization. His book "The Trap" can still be pruchased from online bookstores. And his 2-hour long interview with Charlie Rose can be downloaded through YouTube.com.

What the major to medium-sized nations of the world need to do is reignite the spirit of economic nationalism.

The economic policies of nations should be constructed on the premise that domestic consumption should be drawn from domestic production to the maximum extent possible; and that domestic production relies on domestic labor and resources to satisfy domestic consumption to the maximum extent possible. That would truly be "Inclusive Capitalism".

Such a system could be protected and enforced through a universal, uniform and punitive tariff rate  imposed upon all goods and services coming into the country. Governments should pick no favorites, by exempting or reducing tariffs on imports from one of more favored countries or favored industries. The domestic operations of foreign-owned companies should be treated as domestic production to the extent that their production, employment, labor, and financial operations are domesticated.

Should we return to nation-centric economic policies, the reverse flow of capital back into these countries, and the demand for domestic  labor and resources, would be enormous and long-lasting. Deflation would be a dead issue for even longer; and central banks and government think tanks would get working overtime trying to rationally allocate the demand for money, manpower, materials, and the growing domestic market demand for all the outputs.

And here's the thing: the material well-being of everybody in these nation-centric economies would stand a greater chance to improve, even the elite capitalists who have done so well during the current disorder. It might mean that they won't be getting richer so much faster than the rest.

Mon, 11/03/2014 - 16:05 | 5407859 FrankDrakman
FrankDrakman's picture

The economic policies of nations should be constructed on the premise that domestic consumption should be drawn from domestic production to the maximum extent possible; and that domestic production relies on domestic labor and resources to satisfy domestic consumption to the maximum extent possible. 

You are describing 'mercantilism', more or less, which has been soundly rejected because 1) it leads to endless war, and 2) pace Smith, it actively discourages comparative advantage, resulting in a world that's poorer overall. 

Our problem is we gave the 3rd world soap, water, and the Internet before we gave them birth control. Now that half their kids don't die in childbirth, there's a huge upsurge in the amount of low-skilled labour available, and manufacturing and some services have chased it around the world, to the detriment of the low-skilled among us. Unfortunately, there are only so many jobs for street cleaners and burger flippers, so we now have the FSA at home, and the much bigger FSA in the developing world.

Still think Ebola was an accident?

Mon, 11/03/2014 - 01:26 | 5405878 Clowns on Acid
Clowns on Acid's picture

Long winded article that says to reinstate Glass Steagal, stop QE, cut Federal spending on Education, Housing etc., and turn it over to the States.

Mon, 11/03/2014 - 01:32 | 5405884 Vidar
Vidar's picture

Piles of steaming verbiage signifying nothing.

The problem is simple: what we have is not capitalism, it is fascism. When you can't do business, or even drive down the road, without a permission slip from your masters you are not free. Capitalism requires freedom, sound money, and a common understanding that everyone is better off if people mind their own business. Calling a system without these ingredients capitalism is simply another attempt to mislead the sheep.

The whole thing has to burn so that a new civilization can rise from the ashes. If humanity is to have a future it must throw off the delusion of statism and collectivism. This is most likely the last chance.

Mon, 11/03/2014 - 02:55 | 5405967 Socrates
Socrates's picture

"what we have is not capitalism, it is fascism"

Of course we are a fascist nation now. FDR was enamored with Mussolini's policies and we were quite fascist during WW II. It's economic war now but what is different that Mussolini's Italy is they they would kill a politician before a banker.

Mon, 11/03/2014 - 01:36 | 5405888 fibonacci's claus
fibonacci's claus's picture

capitalism is having a tank full of pirahna in your office.

capitalism is leveling baghdad and then sending contractors in to rebuild, and then doing it again, and again, and again, and again, for 25 years !  now that's capitalism.

capitalism is blowing up the agentine economy.  and then doing it again, and again, and again.

capitalism is ex- goldman sachs employees at the SEC, the CFTC, and every other financial beuarocracy in the u.s including treasury secretary

capitalism is alan greenspan denying gold like judas denied crist, and then speaking at golds funeral as its paper contract manipulated to 900/oz

capitalism is having two sets of books, and two sets of ethical/moral standards; one for the groundlings and the other for the timmy geitners of the world.

capitalism is doing g-ds work, for the gentiles of the world, with generations and generations of hebrews running the federal reserve.

capitalism is ebola!

capitalism is a $250,000 education, without the job.

capitalism is having to decide whether to pay your child support or your irs tax bill at the end of the year.

capitalism is the preditory guilt negative transferrence of commercials on t.v subliminally goading you to give to that staving black child in africa, you know the one with flys all over his face...  as obama and george soros put millions of illegal south american aliens on trains and planes, letting them invade our country across an unprotected border.

 

please feel free to add.  this is the short list

 

Mon, 11/03/2014 - 20:01 | 5405917 livefreediefree
livefreediefree's picture

Here's an even shorter list: Socialism and/or Progressivism leads to tens or hundreds of millions of deaths.

Mon, 11/03/2014 - 02:32 | 5405945 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Capitalism is dead.

Elvis is dead.

Ramones are dead.

Economy is dead.

America is dead.

Zombies are dead.

Greenspan is alive, and counting his money, America.

Summers is alive and counting his money, America.

Rubin is alive and counting his money, America.

Bernanke is alive and counting his money, America.

Geithner is alive and counting his money, America.

de Rothschilds Bank is alive and counting your money, America.

 

SUCKERS

Mon, 11/03/2014 - 03:48 | 5405993 smacker
smacker's picture

I see virtually nothing on your list which can be described as "capitalism".

It is only the Left who describe today's rigged markets, economic central planning and massive/widespread corruption as "capitalism".

Capitalism as most people understand it almost died and is currently in intensive care waiting for its glorious return to health after the criminal central bankers, banksters and political elites have been held to account and dealt with.

Mon, 11/03/2014 - 07:10 | 5406100 Gadfly
Gadfly's picture

Agree with your indictment of central bankers and elites.  But the rest of your point assumes unfettered capitalism does not bear the seeds of its own destruction.  Capitalism is a game, like basketball or football, that must be played with rules and referees, or it will quicly devolve into chaos.  Human nature insures this outcome.  Anyone who played sandlot football as a kid knows this.

Mon, 11/03/2014 - 07:40 | 5406122 smacker
smacker's picture

I've always believed that capitalism needs to be regulated to avoid the very problems you describe.. The term I've used are regs that are "necessary and effective" with severe sanctions imposed for wilful violations (eg like what we've seen in recent years).

But what we see today is not unregulated capitalism or capitalism that's gone out of control, it's manipulated/manufactured/centrally planned capitalism. aka corrupt corporatism, which has little to do with free market capitalism.

Mon, 11/03/2014 - 15:44 | 5407736 FrankDrakman
FrankDrakman's picture

Back in the 70's, when I was at U of Toronto, I had an eco prof who was into game theory. His work showed that in any 'pure capitalist' system, eventually one player wound up with all the money. 

"What happens then?" I asked as a 22-year old undergrad. 

He grinned and said "Forcible reset". 

Mon, 11/03/2014 - 15:53 | 5407772 livefreediefree
livefreediefree's picture

Ah, lucidity, smacker.

Mon, 11/03/2014 - 01:54 | 5405909 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Here is the renewall order from below. Restore Glass-Steagall and back the fucking currency with gold, motherfucker. Do a helicopter drop of fucking physical gold bullion in my fucking yard and let me grow my own fucking pot, motherfucker.

NOTE: Motherfucker is 'the man' being de Rothschilds Bank in this instance.

Mon, 11/03/2014 - 09:38 | 5406314 IndianaJohn
IndianaJohn's picture

Nigger talk.

Mon, 11/03/2014 - 02:25 | 5405937 DeusHedge
DeusHedge's picture

It will be perfect in the end. But before that there will be a lot of killing, murdering, and slaughtering of the sheep. Or sheeple.

Mon, 11/03/2014 - 02:28 | 5405940 viedoklis_lv
viedoklis_lv's picture

There is no free market capitalism there is collectivism and monopoly capitalism - it rules US and Russia, China, EU, etc.

http://youtu.be/cVdI4Kx8TdY

Mon, 11/03/2014 - 03:41 | 5405989 smacker
smacker's picture

It's good to see you're getting to understand what's happening. :-)

There is collectivism and crony fascist corporatism, which amount to much the same thing. Often referred to as "privatisation" of profits and "socialisation" of losses.

Mon, 11/03/2014 - 04:27 | 5406006 Jano
Jano's picture

how you dare critisize democracy and NATO?

How you dare put US and Russia at the same height?

Mon, 11/03/2014 - 05:36 | 5406056 tumblemore
tumblemore's picture

"the West's liberal economic and social order seemed on the verge of an unstoppable march of triumph. Communism had failed"

 

I think it was partly the threat of the alternative Communist model that restrained the banking mafia. As soon as the threat looked like fading they paid the politicians to start removing every restriction on their debt pushing and within a couple of decades crashed the entire planet.

 


Mon, 11/03/2014 - 05:42 | 5406058 BlackVoid
BlackVoid's picture

Nothing will change for the better. The system is dying because net energy is in decline.

Without a miracle (cold fusion), this trend will continue.

There may be a revolution, but that will not bring prosperity for the masses no matter what system they adopt.

Mon, 11/03/2014 - 05:55 | 5406063 kurzdump
kurzdump's picture

Taking the wrong road is usually no big deal. You just turn around, head back to the road junction and take the right way.

However, if you keep driving the wrong way thinking 'what could possibly go wrong' you might end up in the middle of 'nowhere' - at some point it doesn't matter if you keep driving straight ahead or turn around, you will run out of supplies and die.

Our system took the wrong road back in the 70s. The first 'road closed' signs were seen decades ago - some people triggered an alarm, most of them didn't care. Today the end of the road is in visibility range. It doesn't matter if we slam on the breakes or accelerate to full speed. The system will die either way, killing most of its components (people). What's a better way to die? Starvation or clubbed to death?

Mon, 11/03/2014 - 06:29 | 5406083 Batman11
Batman11's picture

Where does it start?

1) Japan's idiot bankers fuelled a ridiculous property asset bubble.

No one wanted the losses to crystallize with the necessary correction/recession/depression.

Trying to mask the stupidity of investors/bankers and letting them take the hit on their assets has caused stagnation in Japan ever since.

 

2) Wall Street's idiot bankers fuelled a ridiculous property asset bubble and with complex financial instruments exported this through the Western financial system.

No one wanted the losses to crystallize with the necessary correction/recession/depression.

Trying to mask the stupidity of investors/bankers and letting them take the hit on their assets has caused stagnation in the West ever since.

 

 

 

Mon, 11/03/2014 - 06:59 | 5406093 css1971
css1971's picture

Remove power from the center and move it to the edges.

Imagine the political power structure as a tree, with individuals as the leaves. As power is centralised it moves from the leaves down the branches towards the trunk of the tree. The more centralised it becomes the more easily corrupted and misused by a small number of people. i.e. the greater the leverage.

Central government is the trunk of the tree, main branches would be the states and local governments would be the small twigs. Each power should be moved as far towards the twigs and leaves and away from the trunk as is possible.

Bearing in mind that money is power, it means that in general the ability to spend should be moved as far towards the leaves as is possible. e.g. power to tax. the power to create money.

This isn't terribly difficult to understand. The 1% obviously would want powers centralised because it gives them the greatest leverage over the population. The population should want powers decentralised because it gives them the greatest personal power and economic benefit. Any act of centralisation should be seen as retrograde.

Mon, 11/03/2014 - 07:24 | 5406107 negative rates
negative rates's picture

And then the wind blows, the rotted roots give out, and the whole tree just like humpty, comes CRASHING down.

Mon, 11/03/2014 - 07:32 | 5406116 corndog
corndog's picture

Apply the law to all.

Mon, 11/03/2014 - 08:49 | 5406213 tumblemore
tumblemore's picture

very radical but it's worth a try :)

Mon, 11/03/2014 - 07:55 | 5406131 Boscovius
Boscovius's picture

What if all of this "inclusion" nonsense is just a cloak to hide the fact that our globe has reached it's carrying capacity?  Anyone ever consider that bringing the 99% up to a standard of living that is even marginally better than what it is now would create such resource and environmental strains on the planet that it would be disastrous for us all?  Truly, a Tragedy of the Commons.  Just a thought.  Junk away.

Mon, 11/03/2014 - 08:16 | 5406158 tumblemore
tumblemore's picture

With the current state of technology that would be true if the world was gradually lifting upwards and the question was where are the resources going to come from - at the very least it would take something like fusion power to make that possible.

 

But the world going up isn't the current problem. The current problem is the world going down because the banking mafia have extracted so much wealth through their various scams that the real economy of producers and consumers is malfunctioning.

 

Mon, 11/03/2014 - 07:54 | 5406136 Last of the Mid...
Last of the Middle Class's picture

inclusion is  a nice little word. I just don't see it happening with the supremes, lawyers, bankers, pols and uber wealthy doing everything they can to prevent it. This is where we are and the truth is that you cannot unfry an egg.

Mon, 11/03/2014 - 08:19 | 5406169 22winmag
22winmag's picture

Busy day at the shooting range yesterday. The 3 percent know what's up.

Mon, 11/03/2014 - 08:51 | 5406199 Notsobadwlad
Notsobadwlad's picture

My first comment, is that this could have been written in 1914, 1929, 1999, 2007 or 5 years ago. The diseased system has been the same, time has simply made it more risky for those at the top.

When the banks, through their owned politicians, passed Gramm-Leach-Bliley and the Commodity futures Modernization Act of 2000 they made legal what they were doing in secret anyway. Just as they handle money for the drug cartels ... why not make it legal, as Corzine-like fraud, executive theft and rigged markets have been made legal?

Maybe it is because they serve Mammon and not God. They call themselves servants, but they do not serve man ... and it just keeps getting worse. Hire more muscle to murder the people who see through, keep the media as a lapdog and threaten governments with pulling away their golden teit. Personally, I believe that this period in time is a test of our character and the vast majority of those at the top have failed miserably. They are corrupt at their core.

You wrote a long article by ZH standards. Comments could be just as long, but "what is the point?". In a corrupt system the creative and visionary either are captured and enslaved by the corrupt system or they withdraw to let it die. The nail that sticks out gets hammered down.

And who is to say that it has not all been done intentionally as some "great work" leading to depopulation and a single global police state? Do you really know for sure?

Sorry, bub. The elitists have to fix themselves. No one from the bottom has the time or the inclination.

Mon, 11/03/2014 - 09:55 | 5406366 RaceToTheBottom
RaceToTheBottom's picture

Inclusion does not apply to the mining industry and that is what we are talking about here:  

The mining industry.  

The Financial Industry mines their "clients" for every last $.

WTF does inclusion have to do with yachts?  Exactly nothing.  Where are the client's yachts?

Mon, 11/03/2014 - 11:18 | 5406686 Salzburg1756
Salzburg1756's picture

Yidocracy kills markets.

Mon, 11/03/2014 - 11:56 | 5406845 michelp
michelp's picture

NOTHING we haven't heard before a M. times in the last 2 years.

Perhaps the transformation should be from Capitalist to a Co-Operative model.

Who knows the empowerment it could produce?

m.

 

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