Finance's Ethics: A Leap Into The Past
Someday we will have to think over the impact the fall of the Berlin Wall had on the world for both winners and losers.
In those years after the fall, Francis Fukuyama wrote the famous book The End of History where he stated that with the end of communism, capitalism was going to become an eternal reality. He recently wrote in the New York Times (NYT) an article asking for limits to the excesses of corporations, the same corporations to which this newspaper dedicates several pages in its analyses.
The winners of the fall of communism were politicians, who had military power and new technologies at their disposal. The world of corporations (when finance was still a part of it) played a fundamental, albeit indirect role, until then. And the defenders of the West (we are talking about 1988, which seems so far away today) presented a model of capitalism that today is disappearing.
It was a capitalism shaped by the social struggles of the industrial revolution and that had progressively incorporated, as a basis of its evolution, values such as social justice, participation and democracy-the basis of social organization; a capitalism that had accepted trade unions, social and business pacts and labor as a fundamental right for a dignified existence.
Today, this type of capitalism is disappearing. In 1950 American finance speculator Bernard Baruch provoked a scandal by theorizing that the boss of a company had the right to earn as much as sixty employees together. Today it is common that a boss earns as much as hundreds of them. There was a time when corporations were dedicated to art and society's patronage.
William Pfaff, while interviewing the CEO of the American insurance giant AETNA, reminded him of this period of social capitalism. Pfaff was told, "I cannot see a better example of the betrayal of shareholders' interests. The duty of a corporation is to give them all the benefits. What goes on outside of society does not interest us". The decline of the fabric of communitarianism, of associations and of the civic sense of our societies has been striking. Sociologist Robert Putnam wrote on this in his excellent book Bowling Alone, where he describes the disappearance of a previously solidary, communitarian and associative American world.
At the beginning of July NYT's conservative commentator David Brooks published an article defending "modern capitalism" by observing that greed is a strong stimulus for success. And if hundreds of thousands of jobs were relocated it is because "modern capitalism" has a global vision, not merely a national one. The result is the creation of hundreds of thousands of jobs in third world countries, which is an objective result of profound social significance.
Brooks also states that it is possible that this was done to give bigger, legitimate profit to companies and that the new workers are in a way exploited, but it will be solved in the long run. Modern capitalism, although not having any kind of social consciousness, continues to be the motor of history.
This type of logic would have been unthinkable before the fall of the wall. Nobody would have thought of praising greed and presenting the loss of millions of jobs for the sake of major company profits as a positive thing. The fact that today it occupies opinion pages of a respectable newspaper demonstrates how the world is changing. Today, certain things are being said that no one would have dared saying in the past. And the worst is that readers accept these statements with normalcy.
We are facing a profound change of values. It is worth remembering that the values of egalitè - social justice -, fraternitè - for example, trade unions -, and solidaritè - having the social, medical, educational and pension structures that today are falling apart -, were not only in the banners of the French revolutionaries, but are today enshrined in the Constitutions of our modern States.
Finance, and not industry, has been the motor of "modern capitalism". Industry was the motor of the old capitalism. In a very short time, capital has concentrated in finance in order to obtain faster and larger profits than with industry.
Facebook's arrival to the stock market - a company of three hundred people and some small offices, was valued above Boeing, with sixty thousand workers, huge facilities for the production of planes and high-level scientific laboratories.
Facebook bought INSTAGRAM- an internet company with six employees - for one billion dollars. In the world of real economy, how much time, sacrifice, investment and production is needed to sell a business for a billion dollars? To what reality does this stock market refer to?
It is indeed instructive to know that in 2010, the total value of production of goods and services of one day in the world was close to one million billion dollars. That same day, the total of financial transactions was set to forty million billion dollars. Transactions grew four times since 2004.
On the 23rd of July, the Observer published a study according to which between 2005 and 2010 the world economic elite evaded at least 17 million billion dollars. Almost nobody knows how much is the astronomic amount of 'million billions'. It is enough to say that by counting seconds of time, one would need 317 years to reach a million billions. Now, the 17 million billions of tax evasion mentioned above are more than the Gross Domestic Product of two countries such as the United Stated and Japan together. The study demonstrates that 6.3 billion of the evaded capital belongs to 92,000 people, that is, to 0,001% of the world's population. But the study also reveals that by the end of 2010, the fifty biggest private banks in the world managed more than twelve million billions within the business of fiscal evasion. The three most active were UBS, Credit Suisse and Goldman Sachs. Who remembers the 2008 G20 meeting in London where Sarkozy, Merkel and Obama declared an "immediate and definitive war on fiscal paradises"?
The political system's inability to control finance is the source of "modern capitalism's" overwhelming force. Far from defending and applying constitutions, politics has become an instrument at the service of markets. I am not sure how many of you have noticed, but until now, no fraud of the financial system for the damage to community has brought anybody important to jail - note that Bernard Madoff was an individual, not a bank.
Let's take one of the above-mentioned banks: Union des Banque Suisses (UBS), set up in 1854 in Calvinist Switzerland; an example of civism and neutrality, it has now about 60,000 employees. To quote only some recent data, in 2008, UBS was forced to give back 22.7 billion dollars to clients that were pushed by the bank to buy bonds and titles, while its bosses were selling them aware that they would lose value. UBS paid a penalty of 150 million dollars in order to avoid a trial for fraud.
In 2009, UBS paid 780 million dollars to the American government to help in the struggle against tax evasion (one employee brought a diamond in a tooth paste tube on behalf of a client) while at the same time it was paying 200 million dollars as a fine for overstepping its limits in the United States.
In 2011, UBS was identified as having conspired for 5 years in falsifying derivatives markets at the expense of over 100 municipalities and non-profit organizations, eventually paying 160 million dollars in penalties.
And now it has a pending claim for one billion dollars for having issued "false declarations and omissions" in the mortgages market that led to the collapse of Frannie Mae and Freddy Mac, the state mortgage companies, which were the triggers of the crisis that we have been living in since 2008.
Last year, UBS had more than 26 billion dollars in profits. Considered "too big to fail" without damaging the economy (the dream and goal of all banks), the Swiss government gave them 50 billion dollars to save itself from a financial crisis.
The last scandal, which revolved around the falsification of the business tax between banks, the Libor, is going to give UBS another headache. Barclays, the big English bank - based in the land of Anglicanism - was already fined 450 million dollars. The CEO, Bob Diamond, who last winter said "it is time to stop attacking bankers" had to resign. As opposed to what Mr. Diamond demands, instead of bankers, the term bankster is being used again, a term that was very popular during the Great Depression following 1929.
A democrat president of another era, Roosevelt, introduced strong regulations on finance, which lasted until 1999 when Bill Clinton abolished them to comply with Wall Street. It was the same Diamond who organized the meeting between the republican candidate Mitt Romney and the American financial world in London. More than 2 million dollars were raised.
Romney attacked the Frank Dodd law that the American congress introduced as an attempt to reduce out of control speculations in Wall Street, declaring that he will eliminate all attempts to fetter freedom of finance. Romney is a Mormon. Do you think that religion makes a difference? Apparently not: the CEO of the Nomura Bank, Kenichi Watanabe, just resigned, in a country of Confucian ethics.
All these penalties on finance mean that banks pass these quotes on to their clients and shareholders, while executives keep their salaries and bonuses that have nothing to do with their performance. Even renouncing his compensation, Diamond managed to accumulate 130 million dollars in his mandate. This is equivalent to a yearly salary of 10.833 "a thousand eurists", the ideal salary of most young Europeans.
The numbers that illustrate Europe's social and human crisis and the erosion of the American middle class are already so well known that they are not worth quoting. What is worth thinking about is whether we are headed towards an era of inequalities of the magnitude of those seen during the industrial revolution, when Marx published his famous white book about exploitation in factories.
The decline of trade unions (today representing 8% of the working force), the dismantling of the health and educational sectors, the elimination of funding for research and culture together with cuts in spending for international cooperation are leading us down a same familiar path again.
But the most serious issue is that of the dismantling of values born out of the difficulties of past forms of capitalism. This dismantling is strengthened by the passive acceptance on the part of citizens, anesthetized by decades of education in consumerism (Currently, per capita spending on commercials is higher than that on education all over the world), by reality TV shows such as Big Brother; by a crisis in the quality of journalism, dedicated more and more to reflect events and not processes; by the individual's preference for seeking refuge in the loneliness of a computer rather than participating in group or associative activities.
The list is very long and each can add what he or she observes at home. From my point of view, the fact that today "modern capitalism" sees the church's social doctrine as a troublesome nuisance is telling of the present state of affairs.
The most poignant issue that distinguishes our era from that of the industrial revolution is that the political system - the guarantor of the constitution - lost its legitimacy and participation, especially in the eyes of the youth. This is how it succumbs to finance day after day. This year, the American political campaign will surpass four billion dollars. And Romney has a bigger "war chest" than Obama.
The Supreme Court gave corporations the right to make unlimited donations, something that can be illustrated by numerous examples. It was recently discovered that the Secretary of Treasury of the United States Timothy Geitner knew about the manipulation of Libor since 2008, but did little more than warn the Governor of the Bank of England, Mervyn King, who now says he didn't act because the warnings were too vague.
The truth is that nowadays fraternity only exists between the elites of finance and the economy, elites who easily interchange seats and who work under the principle that the role of the state is merely to rescue them with public money whenever they make mistakes.
The case of Spain - dragged by the crisis of Bankia, which, with the approval of the Minister of Finance, declared being in the active until the very last moment - is crucial to understand how things are going. It is already questioned whether the 120 billion euros to bail them out - money to be paid by the exhausted Spanish citizenry - are enough.
Iceland, a country where the economy was thriving, saw itself dragged into a crisis caused by the banks, and took a path that nobody is talking about. It held a referendum where the people decided banks were going to be allowed to fail and where its citizens incriminated a government that allowed itself to be used by banks. It is the only known case - and this is the reason why it is not quoted - when politics, based on citizen participation, decided to let banks fail and condemn its politicians. Iceland is today in a much better position than Spain, Italy, Ireland, Portugal or Greece.
If politics does not return to inspiring itself on values and on taking risks, we will enter an era of populism of gloomy outlook. The right wing and escapist parties are entering European polities, as seen in the Hungarian case, the Pirate Party in Germany, or Beppe Grillo in Italy.
The Republican Party's right-wing drift, influenced by the Tea Party, has been greater than Bush's drift under the influence of the neo-conservatives. Bush had as an ideology the American dream. Romney has as an ideology one of the most conservative financial and religious elites. If he wins the election we can forget about trying to mitigate climate change, something that he considers an ideological conspiracy against power companies, rather than a real problem. This in the midst of a dramatic drought in the US and while Antartica keeps melting.
Details about daily life are windows into society. We now find out supermarkets, restaurants and bars are raising the decibels and the number of beats in their background music. This is based on a study that shows that the higher the volume and the noise, the more old people delegate shopping to the young, who consume more and faster.
A study published in 1988 in the journal "Alcoholism: Clinic and Experimental Research" demonstrated that if music in a bar was at 72 decibels, clients would consume an average of 2,6 drinks and would take about 14,5 minutes to drink one. But if the music was turned up to 88 decibels, clients would drink an average of 3,4 drinks, taking only 11,5 minutes to finish each one. A restaurant in New York, the Beaumarchais releases 99 decibels. Tables are freed quickly. According to American labor laws, nobody should be without acoustic protection at such levels for over 19 minutes.
"Are we manipulating you? Of course we are" said Jon Taffer, a restaurant and nightlife consultant, and the host of the reality show "Bar Rescue". "My job", he said "is to put my hand as deeply in your pocket as I can for as long as you like it. It's a manipulative business".
"Modern capitalism" is thus reaching bars, restaurants and shops. It is not only a City or Wall Street phenomenom.Roberto Savio, founder and president emeritus of the Inter Press Service (IPS) news agency and publisher of Othernews.