Property speculators and buyers of price-gouging opportunities for monopoly rent on credit have a similar operating philosophy: “rent is for paying interest.” The steeper the rate of monopoly rent, the more privatizers will pay bankers and bond investors for ownership rights. The financial sector ends up as the main recipient of monopoly rents and land rents, receiving what the landlord class used to obtain.
What is so remarkable is that all this has been done in the name of “free markets,” which financial lobbyists have re-defined as freedom from public ownership or regulation. The financial sector has managed to mobilize anti-government ideology to pry away the public domain and lobby to block regulation legislation. Government planning is accused of being inherently bureaucratic, wasteful and often corrupt, as if the history of privatization deals is not one of corrupt insider dealing and schemes to obtain rights for rent extraction that makes such economies much less competitive.
Financializing industry to turn profits into interest and stock buybacks
Early in the 20th century the wave of the future promised to see banks throughout the world do what they were doing best in Germany and Central Europe: coordinating industrial links with government and acting as forward planners (Chapter 7). Academic textbooks draw appealing pictures of banks financing capital formation. Low interest rates are held to spur industrial investment by making it more profitable to borrow.
But banks rarely fund new means of production. They prefer to lend for mergers, management buyouts or raids of companies already in place. As for bondholders, they found a new market in the 1980s wave of high-interest “junk-bond” takeovers. Lower interest rates make it easier to borrow and take over companies — and then break them up, bleed them via management fees, and scale back pensions by threatening bankruptcy.
Like other sectors, industry was expected to become more debt-free. Bank lending focused on trade financing, not capital investment. Economists urged industry to rely mainly on equity so as to prevent bondholders and other creditors from taking over management and keeping it on a short leash. But industry has become financialized, “activist shareholders” treat corporate industry as a vehicle to produce financial gains. Managers are paid according to how rapidly they can increase their companies’ stock price, which is done most easily by debt leveraging. This has turned the stock market into an arena for asset stripping, using corporate profits for share buybacks and higher dividend payouts instead of for long-term investment (Chapter 8). These practices are widely denounced in the financial press, but the trend is not being checked (Chapter 9).
Financializing industry thus has changed the character of class warfare from what socialists and labor leaders envisioned in the late 19th century and early 20th century. Then, the great struggle was between employers and labor over wages and benefits. Today’s finance is cannibalizing industrial capital, imposing austerity and shrinking employment while its drive to privatize monopolies increases the cost of living.
The financial takeover of government
Central banks were supposed to free government from having to borrow from private bondholders. But budget deficits have increased the power of financial lobbyists who have pushed politicians to reverse progressive income taxation and cut taxes on capital gains. Instead of central banks monetizing deficit spending to help the economy recover, they create money mainly to lend to banks for the purpose of increasing the economy’s debt overhead. Since 2008 the U.S. Federal Reserve has monetized $4 trillion in Quantitative Easing credit to banks. The aim is to re-inflate asset prices for the real estate, bonds and stocks held as collateral by financial institutions (and the One Percent), not to help the “real” economy recover.
The situation is worst in the Eurozone. The European Central Bank has authorized €1 trillion (“Whatever it takes,” as its head Mario Draghi said) to buy bonds from banks but refuses to lend anything to governments on principle, even though budget deficits are limited to only 3 percent of GDP. This imposes fiscal deflation on top of debt deflation. Governments are forced to rely on bondholders and, increasingly, to sell off the public domain.
All this is contrary to what classical economists urged. Their objective was for governments elected by the population at large to receive and allocate the economic surplus. Presumably this would have been to lower the cost of living and doing business, provide a widening range of public services at subsidized prices or freely, and sponsor a fair society in which nobody would receive special privileges or hereditary rights.
Financial sector advocates have sought to control democracies by shifting tax policy and bank regulation out of the hands of elected representatives to nominees from world’s financial centers. The aim of this planning is not for the classical progressive objectives of mobilizing savings to increase productivity and raise populations out of poverty. The objective of finance capitalism is not capital formation, but acquisition of rent-yielding privileges for real estate, natural resources and monopolies.
These are precisely the forms of revenue that centuries of classical economists sought to tax away or minimize. By allying itself with the rentier sectors and lobbying on their behalf — so as to extract their rent as interest — banking and high finance have become part of the economic overhead from which classical economists sought to free society. The result of moving into a symbiosis with real estate, mining, oil, other natural resources and monopolies has been to financialize these sectors. As this has occurred, bank lobbyists have urged that land be un-taxed so as to leave more rent (and other natural resource rent) “free” to be paid as interest — while forcing governments to tax labor and industry instead.
To promote this tax shift and debt leveraging, financial lobbyists have created a smokescreen of deception that depicts financialization as helping economies grow. They accuse central bank monetizing of budget deficits as being inherently inflationary — despite no evidence of this, and despite the vast inflation of real estate prices and stock prices by predatory bank credit.
Money creation is now monopolized by banks, which use this power to finance the transfer of property — with the source of the quickest and largest fortunes being infrastructure and natural resources pried out of the public domain of debtor countries by a combination of political insider dealing and debt leverage — a merger of kleptocracy with the world’s financial centers.
The financial strategy is capped by creating international financial institutions (the International Monetary Fund, European Central Bank) to bring pressure on debtor economies to take fiscal policy out of the hands of elected parliaments and into those of institutions ruling on behalf of bankers and bondholders. This global power has enabled finance to override potentially debtor-friendly governments.
Financial oligarchy replaces democracy
All this contradicts what the 18th , 19th and most of the 20th century fought for in their drive to free economies from landlords, monopolists and “coupon clippers” living off bonds, stocks and real estate (largely inherited). Their income was a technologically and economically unnecessary vestige of past conquests — privileges bequeathed to subsequent generations.
When parliamentary reform dislodged the landed aristocracy’s control of government, the hope was that extending the vote to the population at large would lead to policies that would manage land, natural resources and natural monopolies in the long-term public interest. Yet what Thorstein Veblen called the vested interests have rebuilt their political dominance, led by the financial sector which used its wealth to gain control of the election process to create a neo-rentier society imposing austerity.