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Ray Dunkle
The East Coker Manifesto on Economy

“And we all go with them, into the silent funeral,
Nobody’s funeral, for there is no one to bury.”
T.S.Eliot, The Four Quartets – East Coker

A specter is haunting the world — the specter of crisis. The democratically elected governments are unable to pose their legislative and financial laws and directives, instead they plea subordination and allegiance to the market demands and to mechanisms where the people have no capability of controlling them. The working and the middle class are heading towards yesterday, to the very beginnings of the 20th century. This transformation didn’t manage to blur the waters of the Marxist analysis and division of the society on classes based on the possession of means of production. Yet, it has led to the creation of the hyper-class.

A class in general is a relationship that represents the collective social expression of exploitation based on the partial or complete accumulation of the production created by others, and its transformation to wealth.

A particular class is a group of individuals within a society or a community, whose identity is defined through its position in the whole structure of the social production.

A hyper-class is a group of individuals who are able to accumulate the surplus directly through the stock market exchanges without their actions being restricted or directed by the production means they may possess.

If any class is not self aware of its position it is irrelevant for its existence.

To begin with, we can say that the working class was never just bargaining its labor. That was just the mere outcome of the procedure. Bargaining, by its very nature presupposes a very specific status quo and guarantees that this status quo shall continue to exist for the economical benefits of the upper classes. Therefore, the bargain was not a freely chosen one. Slaves, plebeians, workers and farmers by having no power to redefine the financial powers on their behalf and to overthrow the social structures that exploited them by accumulating the surplus created from their work, were always forced to make agreements, having as an indirect part of the deal the continuation and the enrichment of the status quo and at the same time they were offered, as a part of the exchange, a hope for a limited social climbing. No need to say that this was and still is one of the methods for obtaining massive subordination primarily to the financial exploitation and subsequently to all the other social restraints.

Christianity (among all other religions) was preaching the massive submission and philodespotism by offering after life hopes and by spreading fear and respect to the authorities - and at the same time laws, hard and endless work, even luck were used as paradigms among the lower strata of a possible escape route. The surplus, created by the industrial revolution and the advances of technology, was not only in economical terms, by stripping off the value of the labor but also in mythical ones as well, for an imaginary construction and justification of the capitalistic society and its participants.

The imaginary construction is always the byproduct of the economical changes that take place in society and they are used by the upper classes in order to stabilize it. One of those myths was that those who were either excluded or suffered by the conditions were to be blamed for lacking specific identities in their characters; like the will, the abilities, strength and the like. Another one was that classes do not exist; there are only individuals.

The revolution in Russia and its fear of it had sparked many changes in the countries and their economies as it was understood that the low wages and the cheap labor force were putting at stake the whole capitalistic structure - a structure which was near in its collapse during the Great Depression. The measures taken in order to prevent the further dismantling of the status quo gave impressive results starting during the early 20th century by lifting up, under tremendous efforts and fights, the working class to the point of the middle class in the developed world – the birth of the welfare state. The real economy was fueled by this uplifting, producing a surplus, not only in economical terms but also for social ones. This surplus gestated the optimism that the generations to come will have a more secure and better life. In late 70’s that was about to change; mostly due to the galloping advantages and changes provoked by the revolution in telecommunications and from the creation of the “shadow banking system”(1) through the development of the hyper-class. Without this revolution it would be difficult, if not impossible to achieve such a transformation. 

Instead of the “shadow banking system”, first introduced to describe the hedge fund activities, the speculators, the huge investors and the like, I would like to use the notion of “metabanks” for these institutions and “metabanking system” for their financial and social activities. The meta- prefix is justified by the fact that these organizations have banks and insurance companies as parts of their infrastructure but they are not limited or controlled by them, nor subjected to the rules posed to these branches by regulatory restrictions. This very system does not only allow the basic players of the stock market to move around the world, to sell or exchange bonds, in secrecy and in the margins of a fair trading but at the very same time it provides them the tools and the means necessary to become the main responsible movers for creating a developing “sub-country” within a country.

The characteristics of this very heterogeneous sub-country are that they do not only include the poor, the workers and the lower middle classes, but also they include a large part of the traditional stock market, industries, small banks, services, in other words anything that can be related to the real economical structure of any country, having assets that cannot compete with the hedge funds even in additive terms. It is a sub-country as well, because it lacks any power over the legislative correlations, regulations, connotations and the like, it is a social pool, the field where the economically stronger parts of the social chain, trapped inside this very frame of existence, exercise their agendas only to the weaker ones as a part of a realpolitik; the weak cannot pose their rules to the strong.

Yet this bellum omnium contra omnes is a class struggle; the lower strata of the society want to climb up primarily economically, having to oppose the middle and the upper classes. Though, the rising of the working class to a sub-middle class level, externally resembling to it on some terms of economical safety, has lead to the obtuseness of her class consciousness, to the fusion of the boundaries that were separating the classes only in consuming power terms.

The sub-country is also a microcosms’ of the hierarchical division of the society, reflecting the financial terror imposed by the hyper-classes and differentiating from them only to the point of the physical expression of terror which is nested on the dominated and expressed by them. This sub-society, unable to realize its potentials and dynamics, divided and restricted to limited economical and social horizons offers by voting its wretched body to the dominant classes.

We have to consider the sub-country as an entity which is in the state of a developing colony because the public sector, the institutions, the workers, their rights, their pensions, the shops, the harbors, the subsoil wealth, everything is at stake, manipulated by and ready to be sold by the neoliberal hyper-class, who seeks for any method to expand its activities, to increase its profits, even to use the “selling out” nexus as a laundry mechanism for its capital. 

These very characteristics of the sub-country allow us to consider it as a class, being in a class struggle with the hyper-class.

It is not a paradox that even a socialistic government can be as equally neoliberal as a right wing one. On the social pyramid governments saw themselves declining from the top of the pyramid near its middle, suffering from the pressure of the upper stones and by their effort to keep its basis connected to them. The pressure is relieved by the subordination of the administration to the hyper-class financial commandments of the meta-banking system and on the other hand by presenting such a quisling methodology as “necessary and logical” to its subjects.

The causes leading to the creation of that metabanking system are not difficult to be traced. (2)

During the mid 70’s new equity markets began to rise, mainly from the created and funded pension schemes and insurance companies. These schemes, once one of the major clients of the traditional banks have been emerged as major players in the stock market, mainly in the USA, depriving the commercial banking system from one of its major funding. The new situation forced the administration to lift some of the basic restrictions, holding from the New Deal era. Thus the commercial banks were forced to find new resources and to create new economical products for more marginal markets-including households and small and medium enterprises.

In the process the gap between the poorer and the richer classes worldwide began to grow disproportionably at the expense of the poorer, forcing large parts of the former middle class to a social downhill in terms of their economical power. This fact turned the banking system to be based not exclusively, or mainly on net interest margins for its income but on the trading of financial assets and on fees and commissions.

This was the economical model exported from the USA in the early 80’s to Europe and worldwide.

Under this transformation another player emerged - the credit-rating agencies. Up till then bank officers and credit committees were responsible for keeping the low level of high risk economical products to be sold. Banks used additive techniques, of summing up the low risky loans with those of high risk only to present their products as of a low risk. Obviously that model started to distance lenders from the consequences of their decision.

But now, under the credit rating agencies, such as Fitch, Moody’s and Standard & Poor’s, institutional investors such as pension funds, insurance companies, trusts, and the like were required to buy investment-grade securities, as rated by one of those rating agencies. The higher the credit rating, the easier it was to sell the asset to a final buyer.

Yet, these rating agencies had no responsibility for their rating. Their possible discrediting in the market was balanced by giving similar reviews only because they were very well paid by the institutions or the countries in order to do so.

The phenomenon of the metabanking system was also aided by a fragmented and light-touch U.S. regulatory regime and loose monetary system, developed mostly as a jerk knee reaction over the last decades and always after crises and an overcomplicated and (as history proved) ineffective global regulatory structure. Each and every financial product was developing its own regulations and of course regulatory committees. Those financial products were considered to be the “very essence of democracy” in the markets while the public sector and the restrictions posed by the governments were regarded as potential enemies and brakes of the exponential development.

By the privatization of many former public services and products the governments minimized their ability to finance the welfare services from taxes, leaving no option but a further privatization of the remaining public sectors in order to collect money. Parallel to that procedure they increased the taxes for the former middle and working classes. That reduced the consuming capabilities and slowed down the rhythm of growth of real economy.

As a result of the globalization, China rose as the main workshop of everyday goods and many developing countries started to have a surplus instead of deficit, as it happened some decades back. The process of de-industrialization of the developed countries became a fact, slowing down even more the rhythm and the amount of money circulated within the market.

This was the biggest opportunity for the private investors, hedge funds etc to take at hand large parts of the stock markets, especially of the smaller countries, expanding to the larger ones as well, helped on that by analogous market regulations between the G20.

Under this process developed countries saw their deficit to increase.

The current of fear spread well beyond the United States, Greece, Romania and the Baltic countries as well, because many other economies around the Atlantic and in Eastern Europe have also been running large and persistent trade deficits with the surplus producers of Asia. 

The situation is reversible. Just as History is not an abstract entity but it is a human construction, conceived to describe their actions within a specific nexus, actions never freely chosen, the same can be said about the Economy. People are creating the Economy and up till now it was created by the upper classes minorities, or the nomenclature for their benefit. On that point I do not want to reduce of the importance of several other factors that influence and guide the human actions, such as philosophical, religious, ethical, biological etc. But the supremacy of the economical one among them, as first between equals is unquestionable. Therefore the first measures need to be taken have to be in this direction.

It must be pointed out that the circulation of every product in a society obeys the rules of social welfare. Finance products must be in the same frame like these of let’s say from tobacco and drugs to weapons. Governments disallow the sale of these products in a free market because of the social costs associated. They use a mixture of constraining advertisement, heavy taxation, restricting access, and prohibitions.

Regulators must force the metabanks and all the financial players as well, to be within the limitations provided by social prudence and that can only occur with heavy taxes on every transaction, restrictions on securitization, registrations of all the derivatives even direct prohibition of certain of certain financial products and transactions. Governments have to impose an additional tax – levy on the banking system comparable to an insurance premium against future crises. The tax would be set counter cyclically, higher in good times and lower in bad times.

Other kinds of instruments with countercyclical effects include fixed-rate borrowings to be repaid not in foreign currency (like U.S. dollars) but in local currency; borrowings indexed to export earnings; borrowings inversely indexed to U.S. interest rates; and, of course, equity-like instruments.

Even more than that, economical structures have to be positively correlated, that means repayments are positively correlated with the ability to repay. If the ability to repay increases so does the repayment. The scope of this is to force the providers of the capital to be correlated with the risk of their investments. In the case of countries, a positively correlated structure must be connected with the GDP of the country; as GDP goes up then interests go up.

It is true that the recent history of financial crises in developed countries proves how difficult it is to rely on regulation alone to maintain stability in the financial system, even when the regulatory capital controls can partially compensate for failures of both the market mechanism and prudential regulation, especially in developing countries. A change is needed in global norms to permit capital controls on inflows and outflows, whether in the form of quantitative restrictions or transactions taxes.

The severe austerity measures followed by many of the developed countries, by cutting down the wages, the pensions and by loosing up the regulations of employment, though they may slow down the increasing rhythm of deficit are incapable of eliminating it. They can be seen as an antiseptic treatment for the dying civil rights, as a sterilized jargon for life-shortening, for the killing impact of gutting income, for selling or cutting off public infrastructure such as social services and benefits, hospitals, education and other basic needs.

The scope is to transform the public wealth to a pay-per-use system where everyone is obliged to pay access prices for roads, education, medical care and other costs of living. But to put it simply, since the rich won’t pay the poor have to. Under that prospect, future crises are about to come even if the current one proves to have not the extent it is expected to. Only because all the developed countries are under huge amounts of debt a radical deletion of the gross debt must be decided.

The previous measures suggested here just clean the market and set the new rules. In order for the market to restart as it should, the cutting down of the debts is essential, a large scale reduction that should limit the deficit, at maximum, to the 25%-30% of the GDP of every country. A large write-off of debts and the savings they back. That and only that will remove the pressure from the governments to pay the demanded interests and it’ll redirect their expenses on the social welfare. This reduction cannot be one-sided; it must be decided from the G-20 committee and to take place immediately.  

Who actually are opposing to these drastic measures? They are the usual suspects. The anti tax rebels of the financial system, the bankers and the corrupted Parliament members and members of the Congress by the financial lobbies. In Europe and worldwide, the financial lobbyists are using the crisis as an opportunity to promote a broad series of bailouts. It was expected. It is crucial to be remembered that they see every crisis, present or future, as a major opportunity to increase their profits through a vast exploitation of it. Of course “accidents” do happen and some of the major finance players do fail. Yet, every crisis is used as the platform for a hostile take over of the areas, the sectors and of the countries that infects.

As Michael Hudson writes “The only way to prevent a regressive tax shift and debt squeeze is gain control of governments on behalf of the spirit of classical economic and Progressive Era reforms. At least, that is what Greek labor is rioting for. Someone must control government, and if democratic forces withdraw from the fight, the financial sector will tighten its grip.” (3)

The Greek revolts show the first step need to be taken for the unification and the homogeneity of the sub-society, the massive protests and strikes are the means that are threatening those who either inherit or stole the privileges of the old aristocracy and Church. It is what fears the most the bankers, the bureaucracy, the religious institutions and their lackeys as well. At the end we will be forced to buy our own chains.

“There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.” (4)

It is the time to strike back. We have plenty to lose.  

(1)     Introduced by Paul McCulley, managing director at Pacific Investment Management Company, LLC (PIMCO). As a paradigm of the importance of this “shadow banking system” with the words of Timothy F. Geithner (who has been President and CEO of the NY Federal Reserve Bank) "In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion.” http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html 

(2)     The present analysis of the financial phenomenon is based and followed closely the thoughts of Prof. Robert Wade from London School of Economics and his article on Challenge Magazine, vol51, issue 4, July/August 2008, “The First-World Debt Crisis of 2007-2010 in Global Perspective” http://www.challengemagazine.com/extra/023_054.pdf  

(3)     Prof. Michael Hudson is Distinguished Research Professor of Economics at University of Missouri, Kansas City (UMKC). In his article “The New Road to Serfdom: An illustrated guide to the coming real estate collapse,” was the first major national article forecasting - in precise chart form - the bursting of the real estate bubble and its consequences for homeowners and state and local government solvency. The used quote can be found on Counterpunch Magazine, in his article “The People vs. the Bankers” http://www.counterpunch.org/hudson05112010.html

(4) Warren Buffet, New York Times, November 26, 2006.

 

 

 

 

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