John Buell

No Way to Run a Government

If life in the first two decades of the 21st century were a game of poker, continuous double-or-nothing bets against the house by a wealthy participant would be routine. Life, however, is not a game, and the US is making escalating bets in the areas of finance, the environment, the international economy and foreign relations. These systems pose significant risks in themselves, and their interactions with each other threaten to unleash positive feedback loops of indeterminate magnitude that may overwhelm us.

With the Obama Administration still threatening another risky military intervention in the unstable Middle East, foreign relations are now the most obvious areas where doubling down appears to be the option of choice. In language reminiscent of Chalmers Johnson’s Blowback, Howard Friel argues: “To the extent that a threat [to the United States] exists today, it is homegrown, incubated in Eisenhower’s ‘military-industrial complex’ — today a military-intelligence-surveillance-complex — which, as we’ve recently learned, is ominously inwardly focused. This wealth-robbing, rights-robbing, multifarious machine, which appears to wag the executive, the legislature, the judiciary, and the press — the entire constitutional scheme — makes serial war of one sort or another around the world. That, in turn, fuels the hatred that engenders the terrorism that creates the security obsession that sells more war. As Mailer warned, it is the positive feedback loop of a totalitarian state.”

Dangerous as is this feedback loop, it has several companions. Other systems are both potent in themselves and just as ominous in their interconnections. The oil/carbon/climate change cycle poses a dire risk. As climate scientists converge on models that highlight dangerous feedback loops, the hydrocarbon industry is focused and reliant on the most dangerous energy sources, such as shale oil. As more shale oil is burned, global temperatures increase and the polar ice caps melt, releasing dangerous methane gas, further exacerbating the process.

It is almost as if the articulation of climate risk intensifies commitment to the forces that cause that risk. Part of the reason why may lie in the relation of the climate cycle to other feedback loops.

The major investment banks play a large role both in financing technological change but also in destabilizing the economy. Much of the prosperity of the post World War II period was made possible by a banking system that had learned — or was compelled to learn — lessons from the Great Depression. Investment banking, those banks making investments in stocks and corporate bonds and in mergers and acquisitions, was separated from those depository institutions where citizens deposited their earnings and sought loans for housing or business start ups. These depository institutions were insured and closely regulated. But the very successes of the post WWII period led to pressures to subvert the regulatory regime.

Wealth, both in the form of personal assets and pension funds, was being accumulated in large amounts. And paradoxically, as Yanis Varoufakis points out in The Global Minotaur, even the post Vietnam and OPEC decline of US capitalism benefited finance. The large and growing balance of trade deficits were offset by inordinate capital transfers to US bond, stock, and real estate markets. These were widely regarded by our trading partners as the deepest, most speculatively lucrative in the world. These beliefs became in fact self-fulfilling prophecies. This was an age of what Hyman Minsky, the noted student and critic of finance capital, called “money manager capitalism,” with economic growth dependent on speculatively driven increases in asset prices.

Enter such innovations as the money market mutual fund. And just as commercial banks were losing some of their depository business, they were also under siege on the loan side. A commercial paper market through which large pools of capital were used to finance short- term loans to big corporations emerged. These largely unregulated funds were able to offer big corporate borrowers better deals for both loans and deposits and naturally eroded a large part of conventional banks’ business.

The push from unregulated commercial paper funds plus the long periods of stability led commercial banks to challenge regulations by moving around them. Special off books units were established and administrators, often persuaded by the logic of smoothly functioning markets, allowed these changes. Banks used their new-found freedoms in bold ways. In the language of Minsky they moved beyond lending to hedge borrowers, who could repay both the principal and interest of a loan out of ordinary income to lending to speculative and even ponzi borrowers, as through loans whose repayment depended solely on continuing appreciation of the asset. Unregulated securitization of these loans coupled with unregulated credit default swaps created new revenue streams and further increased systemic risk. 

Mainstream economics, with its faith in efficient markets, couldn’t see the crisis coming. But long before the crisis Minsky warned, “from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes, the economic system’s reactions to a movement of the economy amplify the movement – inflation feeds upon inflation and debt-deflation feeds upon debt deflation.” 

That unregulated finance can go through such gyrations is bad enough. But its business strategy has dangerous implications for the economy and the biosphere. Investment banking now takes roughly a third of all corporate profits while supplying no tangible benefit.  It has driven speculative land and commodity bubbles thereby depriving alternative energy sources of necessary capital formation. The complex and largely unregulated derivative trades have created a worldwide financial web that threatens to bring down the world economy.

Each of these systems is characterized by complex feedback loops that produce reactions with unpredictable timing and intensity. The interaction of these systems only adds another order of magnitude to the risks.

From a policy point of view, nothing is more urgent than discussion of these institutional strategies that would at least place limits on the positive feedbacks. Finance needs a modernized Glass-Steagall along with capital requirements that increase during boom times and decline during periods of economic decline. A stiff carbon tax coupled with generous rebates to poor and working class citizens is needed to slow the carbon climate change cycle and begin to finance climate mitigation strategies. Thirdly, as energy and water wars, climate change, and economic refugees become more prevalent, the dangers and limits of nationalism must receive increasing attention. Finally, social science itself needs to take complexity, flux, and indeterminacy more seriously. It should cultivate a more generous sensitivity to gaps and problems that may eventually emerge from even its most thoughtful regulations and interventions.

John Buell lives in Southwest Harbor, Maine and writes on labor and environmental issues.

From The Progressive Populist, November 15, 2013