Gluttons At the Gate

There have been an awful lot of good men and women, most in Congress but others,
Jimmy Carter, Ronald Reagan, G. H. W. Bush, Bill Clinton and President Obama among
them, who have been used (in fact, absolutely horn swaggled) by the international and
domestic financial industry into letting a belief in "free trade" create a gatekeeper system
for capital funding.

In the name of the long standing export replacement policies (some call these policies
free trade) followed by the federal government, the private and public institutions and
companies working in finance in the big money center cities have routinely tweaked the
state and federal laws regulating their business and taxing the profits thereon. Fifty years
ago if someone needed credit that exceeded the lending limits of an individual bank, that
bank would tap into its "corresponding banks," other banks with which the first bank
maintained agreements to join with it in funding loans too large to manage along. These
arrangements required all the participants to share the risk of the loan equally and in
proportion to the percentage of the debt a bank took on. In other words, each bank
received the same pro rata income revenue from the schedule of payments, once any
administrative fee was deducted. Also, each participating bank carry the same risk burden
as every other participant.

Now days, if a loan is considered too big for the originating institution, for whatever
reason, the credit is divided into traunces and parceled out among various lenders. The
various traunces may carry similar interest rates and similar dispersal schedules but
frequently do not. The various traunces are divided according to differing levels of risk
with some traunces having priority for repayment over others and, therefore, those with
greater risk receive a greater return in the form of interest. There is always some entity in
charge of servicing the debt on behalf of the creditors. This entity bills for payments,
receives money and disburses funds to the various creditors in accordance with the
contract between them. All very tidy, when it works.
Unfortunately, as we have seen all too clearly, it frequently doesn't work. The system
does more than disburse revenue, it defuses risk and makes foolish underwriting
decisions much more likely, some might say inevitable. Since there has been no real,
meaningful reform of the banking system since the recent meltdown, either in terms of
how the system is regulated or in how the financial incentives are managed for individual
"dealmakers," it should surprise no one when a new crisis erupts in the not too distant
future. By doing nothing to curb the uneven distribution of risk, no new or increased
burden of responsibility has been placed on dealmakers. If you continue to tell financial
dealmakers they can get rich by shouldering ever greater levels of risk and do nothing to
place ever greater burdens of responsibility on those deal makers, what happen last time
will happen again, and soon.

This is a problem but it is only symptomatic of the real, much greater problem. The real
problem is the government's inability to act intelligently in the face of crisis. This is not
another essay on how the Congress and our President are wholly owned subsidiaries of
the financial industry, though that is, basically, true. The real problem is the dogmatic
belief, in the face of all evidence to the contrary, that the ongoing export replacement
policy is the only true religion. Any belief that the facts of modern life more or less
conclusively demonstrate that "free trade" isn't really very good for anybody other than
financiers. Indeed, it is no good for the poor third world nations suffering through it. The
only developing nations that have benefited from free trade policies are those, like China,
Japan and Brazil, who have totally ignored it or worked in direct opposition to it. Smaller
countries, like most Islamic nations, most African nations and many Latin American
nations, including, until it recently ditched the entire concept, India, have suffered
horribly from exploitive wage rates, environmental degradation, human rights abuses and
God knows what else in the way of evil. In the developed west, that is the United States,
Canada and the European Union, mostly free trade states, there has been a slow,
consistent loss of production jobs. Interestingly, most of these jobs have not been lost to
poorer, free trade states but to nations like China which do not adhere to free trade
policies.
You might ask yourself, why, since the religious dogma that is free trade thinking insists
that in an open system comprised of many nations and cultures, production will migrate
to the locales best suited for efficient production of whatever specific thing is being
produced. That this dogma, like all other dogma before it, has proved to be crap should
not come as a surprise to anyone.

The nations that have benefited out of all proportion during the grand export replacement
drive by the west are those countries that slapped tariffs and special taxes and whatever it
took to protect their domestic industry. Damn, what a surprise. For all our bitching about
losing textile jobs to Mexico and Bangladesh and other free trade countries, that isn't
really what happened. We lost most of those jobs to China, Korea, India, Indonesia and
other non free trade countries.

Well, you might say, if China and the others will just play fair then the theory will prove
to be correct. There are two things wrong with that response. First, by the time that
proved to be true the west will have lost its lead, and maybe its productive capacity
entirely, in technology and production. Who's to say the new primary economic leaders
of the world, China and India, will think it is a good idea to let others compete on a level
playing field and, perhaps, take from them what was hard won? They would be fools if
they did. In recent decades there is nothing to make one believe Chinese and Indian
leaders are fools.

The second reason the "we'll wait for Chinese enlightenment" theory will not work is
because the entire notion of free trade being beneficial to anybody is false. The world and
economics simply does not work the way the true believers say it does. Free trade doesn't
work for anybody, period.

What has happened is, in the course of making the world safe for big finance, free trade
has been used to provide financiers, in this country, at least, with prohibitively beneficial
tax incentives and other government provided operational advantages. These advantages
and incentives have the malevolent effect of making investments in financial institutions,
whether publicly traded stock companies or private investment pools, far more attractive
than direct investments into production companies.

Whether it is the absolutely unfair, ridiculously low tax rate charges for profits paid
investors from hedge find and private equity companies or the effective guarantee
provided by central banks that no loss will accrue to a financial institution from a bad
deal with another financial institution or countless other little risk mitigation measures
governments give to banks and major investment entities, the cost of doing business for
financial companies is much lower than for production companies because there is less
risk. There is less risk because our government, and the governments of other western
nations, have decreed it be so.

Of course, even with the whole deal rigged in their favor, the financial geniuses of the
world have demonstrated time and time again, they can and will screw it up. And, when
they do, what happens? They run to Uncle Sugar and demand, for the benefit of all the
great unwashed who need the ATM machines to work, that the government bail them out.
Who knows what the last bailout cost. Some say ten trillion, others twenty-three trillion,
still other upwards of forty trillion. Who can say? No one seems to know the precise
figure and any comprehensive audit of the system would be "destructive" to system
independence upon which everything depends or the "politicians will take over" and that
would be unthinkable. (I suspect the cost of the bailout is, more or less, equal to the
amount of derivative debt swap instruments out here at the time of the crash, around
seventy-five trillion, give or take a trillion.)

Further, we are told that any restriction on the "free movement of capital" will crash the
entire world economy. Also, taxes on financial gains must be kept low, assuming they
cannot be eliminated altogether, or the big money boys will pull out of the nation and
take their money with them.

So, the religion of free trade limits all our options to one; i.e., do whatever the big money
center financiers tell us we have to do. If doing as we are told means the slow elimination
of our productive capacity, if it means the continuing destruction of the middle class, if it
means the inability pf our government to provide basic social services, indeed, if it comes
to mean our government will have the inability to provide even basic services and/or
infrastructure of any kind, no matter. The dogma decrees that we much "stay the course."
If we fail to do so, all manner of horrible things, things like adequate social service
networks, things like adequately funded public education, things like the ability of blue
collar workers to have a middle class life and provide for their families, things like
having safe bridges on our highways, having highways, having public transportation,
having a decent life, all these horrible things (God forbid, it could even include a real
program of public health care) could befall us if we violate the strict demands of our
financial masters.