The financial systems failure was a grand opportunity to change the way the economy works and over the last few years there have been some interesting ideas going round, together with some excellent analysis of what has been wrong. When it comes to economic management, tinkering with the detail is usually a sign that the folk pulling the leavers are trying to manage macro economics as if they were the finance director of a medium sized business, trying to survive the job by juggling the survival of the business, while directors and shareholders compete to pocket profits or chase pet projects. Macro economics is another skill set. It involves understanding the dynamics of the system, not of its parts. If the system is set up with the right rules, it can be left to run - at least until people start to find the way to manipulate them.
The current macro economic rules have been put in place by the finance industry itself. After the financial collapse of the early 1930's there was an attempt to contain the ability of the finance industry to shape macro economic policy, but because Keynes's vital concept of creating a shared global reserve currency (the Bancor) was shunned in favour of the supremacy of the dollar, the new system unravelled from the mid '50's onwards. The upshot was that governments have increasingly lost control of the creation of money, with money creation being dependent on the willingness of banks to risk lending. Much of the world as we know it is a direct result of this.
Banks prefer investment in assets and government debts and services to anything else. This has driven property price bubbles. It has driven privatisation of services and utilities. It has driven a preference for government debt growth over taxation. Banks also like short term arbitrage investments, where the borrower is making a quick killing by cashing in on differences in value. This has driven the transfer of jobs and industrial production to the far east. The expansion of banking and debts beyond the real levels of risk being incurred has been mediated through the derivatives markets, which have effectively been a means of shifting liability away from the banks that created the debts and towards weaker banks, pension funds, businesses and of course governments (tax payers and benefit recipients).
At the heart of this system has sat the US dollar. It is the international currency, backed by oil and protected by the US military. Most trades between countries are conducted in dollars. This means that there is a vast amount of dollars held around the world by non-Americans. These dollars are the power behind the banks' dominance over macro economic policy. They are the money in the tax havens, used for secret and unregulated purposes, undermining the ability of sovereign states to steer an independent course. The risks this money can afford to take, be it as hedge funds, private equity funds, private investments, sovereign wealth funds, or parked business money, is greater than can be taken by investors in transparent, regulated and taxed jurisdictions. The unfair competitive advantage this money has, means it can make profits from investments others would consider too risky or unprofitable after tax. It can also fund investments that are illegal or immoral, such as arms trades and vulture funds, where debts are bought at massive discounts and recovered through the courts.
It was these unaccountable dollars that stripped away the viability of the gold standard, by effectively creating new dollars outside the control of the US Federal Reserve. As the US government came to terms with this reality, it allowed the creation of the US as a tax haven, through the secret and low regulation company administration systems in Delaware and other states. This enabled the big US banks to fully benefit from the position of the dollar. With the connivance of the US Treasury and the World Trade Organisation, the ability of countries around the world to regulate banks effectively was undermined in the late 1990's, enabling the large US banks to export risk and accumulate profit and power.
Control of oil is essential to keeping the dollar's supremacy and it is this that has driven US policy in the Middle East. While creating profits for military and oil companies has been an added bonus, the priority has been to ensure that no major oil trades are conducted in currency that is not dollars or, less favourably gold (which is itself traded in dollars). For these purposes the Neo-Con agenda has been adapted, with its megalomaniac idea to keep the Middle East unstable rather than let Europe, China or any other emerging economy gain the ability to define any alternative to the dollar for oil trades.
This issue of the control of the trading currency was the cause of the two world wars of the last century. Initially Germany tried to challenge the pound, but was thwarted by the US, who understood that it would be harder for the dollar to unseat a currency backed by German manufacturing and the oil of the Ottoman Empire than to unseat the British Pound. Hitler's second attempt was based on the idea of combining a broader European Economy that included both Middle Eastern and Russian oil. Had his political power base not been the viciousness of the Nazi's, he might have succeeded, at least enough to ensure a more equitable post war settlement. As it was the US was able to gain years of advantage while the rest of the world struggled to recover from devastation, with the pound and the British Empire almost completely unseated.
The effective castration of the British finance system after the war was resisted by the Bank of England through the development of the off-shore banking system to use the dollars circulating outside the US to rebuild the City of London's position as a finance centre. With a web of tax havens around the old empire, London was able to suck in dollars, using its expertise in finance and investment to extend the use of the dollar beyond the imaginings or intentions of the US government. Progressively, after the end of the link between gold and the dollar, the US adapted to this reality, with the current model for a global economy emerging as a result and with the lead US banks in a dominant position.
In the years since the 2008 financial crisis, these US banks have consolidated their position, vastly expanding their investments to include utilities and other secure assets. They were able to do this by exploiting the need of governments, particularly in the US, to stimulate economic activity even as the money supply was contracting as banks restricted lending. As governments created money through quantitative easing, the money was used by banks to buy assets, rather than to directly secure lending into the wider economy. Working closely with unregulated funds, the US banks were able to create further opportunities for asset acquisition, particularly in Europe, where the weaknesses of the Euro system was putting countries such as Ireland, Greece, Portugal and Italy into a debt stranglehold.
One of the effects of this has been that countries like the UK and France, although not targeted for their vulnerability by the US banks, have had their sovereignty compromised and have to concede to the US trade and international policy agenda. It is no coincidence that it is these two countries that have been most willing to support the US government's drive to increase chaos in Syria.
Meanwhile of course, around the world, ordinary people are suffering the consequences. The expansion of US power is describing the future of food production in much of the world, with the resulting threat to small farmers everywhere. North Africa and the Middle East are being kept in turmoil. Austerity grips the developed countries that had worked so hard to develop as social democracies. Throughout the democratic world, politicians are corrupted by those who have become super rich through the processes described. The dystopia of Jack London's Iron Heel appears to be becoming reality. Ruthless oligarchs rule with the support of mercenaries and minor oligarchs while society is divided into the oppressed and the crushed underclass.
Meanwhile the carbon clock ticks on ever faster toward midnight. The callous arrogance of the greedy and powerful excludes a change of direction and the sorry boasts of higher house prices and a nudge in the GDP figures occlude the prospect of a public clamour for real change. However all the recent events have given us a much better idea of the revolution needed. It is not so much a political revolution, but a revolution of ideas to overturn the tyranny of fractional reserve banking and all its fraudulent evolutions. It maybe that a change to 100% reserve banking and the creation of new money by a committee, combined with an international trading currency that is not any nations money, is all we need to gain our new smaller energy efficient car. First however we have to get rid of the clapped out old banger. That sadly, is looking a bit of a way off!
