John Buell

Folly of Market Wisdom

Is listening to the “markets” as sound a recipe for success as listening to our mothers? Numerous corporate commentators on CNBC and even on the largely conventional Public Radio suggest that Italy and Greece had no choice except to fire their incumbent heads of government and turn to “technocrats” who would follow the discipline of the market and impose further austerity measures on their respective countries.

Markets, it seem, trump democracy. These conclusions, however, merit closer scrutiny than they receive from the media.The contradictions and confusions even within the current corporate views are stunning.

Consider first the case of former Italian Prime Minister Silvio Berlusconi. He presided over a nation that supposedly squanders vast resources in providing welfare to its poor southern population. And he was so mired in scandal that he could not effectively govern. But how did he get his job? Berlusconi is a perfect product of the same mentality that treats corporations as persons with an unlimited right to finance campaigns. And his media empire reflects the final stages of a corporate consolidation process both unchecked by anti-trust laws and amply funded by government subsidies. The US media like to say they fear that Italy is a warning about our future — government spending out of control, bankruptcy etc. But rather than impending bankruptcy — impossible for a nation like the US that borrows in its own currency — Italy’s media and total corporate domination of the political process represent a more realistic fear.

Major corporate media are also convinced that the rating agencies like S and P speak for markets and provide a superb early warning system. When the rating agencies speak, we best all listen. When S&P downgraded US Treasury bonds, the corporate media were full of predictions that the market for Treasuries would tank and interest rates rise. Yet in fact, the market rallied and long term Treasuries are at historically low interest rates. If anything, the markets — if not their purported media voices—are screaming “please borrow more money so you can get your economy going.” But somehow when markets in fact don’t deliver the approved political message — austerity for all — their wisdom is neglected and no one calls the commentators on their faulty readings of the market’s future. As both Paul Krugman and Dean Baker have pointed out, it is better to be conventionally wrong than correct in one’s challenge to orthodoxy.

Of course, markets are often just as wrong as the orthodox commentators who purport to speak for them. Market moves can build on their own momentum and create unsustainable bubbles. Economic policies and large pension funds and major investors built on the market signals from high tech stocks late in the last century and even more catastrophically from the housing market. The resulting bubble and their implosions were source of grave economic difficulties.

How do these self-sustaining bubbles get going? This brings us to the fundamental question that is omitted in most celebrations of the market. Bubbles are a product of a monetary system that allows private banks to treat money as a speculative commodity, just as multinational corporations treat land and labor as commodities to be exploited in the name of profit maximization.

Canadian Auto Worker economist Jim Stanford, speaking at an Occupy Toronto rally recently, asked a provocative question — what do banks produce to earn their inordinate profits? The short and simple answer is that they print and sell paper. Most of the money we as citizens and consumers deposit in banks does not remain there. Some of it is loaned to small businesses, and for homes and cars. Collateral was required and banks held onto their loans. Once upon a time, in the period between the end of the Great Depression and the late ’70s, banking was limited to this task and financial crises were avoided. The process works as long as everyone has confidence in the banks, and deposit insurance has been a key to that reassurance.

Today investment and commercial banking are often blended, with depository institutions lending money not only for conventional commerce but also: “the banks use enormous amounts of [money] to place bets, enormous bets, buying and selling the paper assets that are created and traded in these towers. It’s gambling, not production. It’s legalized, subsidized gambling, all protected by the state.” The process entails complicated bets on the actions and intentions of others and is inherently destabilizing. “Without massive injections of new credit, the asset bubble could never expand so far – whether it’s sub-prime derivatives, dot-com stocks, or rare earth futures. If speculators had to spend their own money on these asset bubbles, the prices could never rise to such precarious and destructive levels.”

So when someone tells us the market demands such and such, remind him or her that the market has been full of dangerously destructive advice, that the market is hardly God-given.

Public policy, from deposit insurance to bankruptcy laws, to the role of central banks as lenders of last resort sustains these financial markets.

These dangerous markets should be reformed. Stanford goes beyond such modestly progressive ideas as security transfer taxes to suggest that banking loan policy be regulated so that loans flowing into such exotic instruments as credit default swaps and currency bets instead finance new housing, green infrastructure etc. Ultimately democracies should consider public banks, which would use deposits of the vast funds that governments must handle, to loan to other banks in response to perceived priorities. Such an economy would remain capitalist.

Private banks, with their knowledge of local conditions, would have a role, but one limited to financing traditional commerce.  In an era when public finance is burdened by fears of large deficits, steering banking assets from unproductive, even dangerous investment to areas of public need is a low cost alternative to an unjust and unproductive economy.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@acadia.net.

From The Progressive Populist, December 15, 2011