How the Servant Became a Predator: Finance’s Five Fatal Flaws

Roosevelt Institute Braintruster William K. Black explains how the finance economy preys on the real economy instead of serving it. He shows how both have become dysfunctional and warns that we must not neglect the real economy — the source of our jobs, our incomes, and the creator of goods and services — as we focus on financial reform.

---

What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector's current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.

1. The financial sector harms the real economy.

Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large. The finance sector is an intermediary — essentially a "middleman". Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector's parasitism.

Second, the finance sector is worse than parasitic. In the title of his recent book, The Predator State, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation. The facts are alarming:

• Corporate stock repurchases and grants of stock to officers have exceeded new capital raised by the U.S. capital markets this decade. That means that the capital markets decapitalize the real economy. Too often, they do so in order to enrich corrupt corporate insiders through accounting fraud or backdated stock options.

• The U.S. real economy suffers from critical shortages of employees with strong mathematical, engineering, and scientific backgrounds. Graduates in these three fields all too frequently choose careers in finance rather than the real economy because the financial sector provides far greater executive compensation. Individuals with these quantitative backgrounds work overwhelmingly in devising the kinds of financial models that were important contributors to the financial crisis. We take people that could be conducting the research & development work essential to the success of our real economy (including its success in becoming sustainable) and put them instead in financial sector activities where, because of that sector's perverse incentives, they further damage both the financial sector and the real economy. Michael Moore makes this point in his latest film, Capitalism: A Love Story.

• The financial sector's fixation on accounting earnings leads it to pressure U.S manufacturing and service firms to export jobs abroad, to deny capital to firms that are unionized, and to encourage firms to use foreign tax havens to evade paying U.S. taxes.

• It misallocates capital by creating recurrent financial bubbles. Instead of flowing to the places where it will be most useful to the real economy, capital gets directed to the investments that create the greatest fraudulent accounting gains. The financial sector is particularly prone to providing exceptional amounts of funds to what I call accounting "control frauds". Control frauds are seemingly-legitimate entities used by the people that control them as a fraud "weapons." In the financial sector, accounting frauds are the weapons of choice. Accounting control frauds are so attractive to lenders and investors because they produce record, guaranteed short-term accounting "profits." They optimize by growing rapidly like other Ponzi schemes, making loans to borrowers unlikely to be able to repay them (once the bubble bursts), and engaging in extreme leverage. Unless there is effective regulation and prosecution, this misallocation creates an epidemic of accounting control fraud that hyper-inflates financial bubbles. The FBI began warning of an "epidemic" of mortgage fraud in its congressional testimony in September 2004. It also reports that 80% of mortgage fraud losses come when lender personnel are involved in the fraud. (The other 20% of the fraud would have been impossible had these fraudulent lenders not suborned their underwriting systems and their internal and external controls in order to maximize their growth of bad loans.)

• Because the financial sector cares almost exclusively about high accounting yields and "profits", it misallocates capital away from firms and entrepreneurs that could best improve the real economy (e.g., by reducing short-term profits through funding the expensive research & development that can produce innovative goods and superior sustainability) and could best reduce poverty and inequality (e.g., through microcredit finance that would put the "Payday lenders" and predatory mortgage lenders out of business).

• It misallocates capital by securing enormous governmental subsidies for financial firms, particularly those that have the greatest political power and would otherwise fail due to incompetence and fraud.

~ more... ~

The Psychopath as Successful Evolutionary Strategy

From Why women really do love self-obsessed psychopaths by Steve Connor (The Independent)

Bad boys, it seems, really do get all the girls. Women might claim they want caring, thoughtful types but scientists have discovered what they really want – self-obsessed, lying psychopaths.

A study has found that men with the "dark triad" of traits – narcissism, thrill- seeking and deceitfulness – are likely to have a larger number of sexual affairs.

Peter Jonason, of New Mexico University in Las Cruces, believes that these traits may have an innate, genetic component that explains why some men seem unable to stop themselves behaving badly.

The dark triad of traits are the self-obsession of narcissism, the impulsive, thrill-seeking and callous behaviour of psychopaths and the deceitful and exploitative nature of Machiavellianism. "We have some evidence these traits may represent a successful evolutionary strategy," Dr Jonason told New Scientist magazine.

~ more... ~

Hungary Media Law Outrage

From Hungary's 'Orbanization' Is Worrying Europe, by Erich Follath (DerSpiegel)

The move by Hungary's right-wing government to muzzle the media is the most recent example of a disturbing political trend in the country that was once hailed as a model for post-commununist development. Should Europe impose sanctions just as Hungary is about to assume the rotating EU presidency?

The Hungarians have been Europe's heroes twice in the last few decades. The way they fearlessly faced off against Soviet tanks in 1956 and fought for their ideals remains unforgotten. In 1989, they courageously opened the borders that separated Eastern Europe from freedom. And in the initial years following the fall of communism, many saw Budapest as a possible model for the successful development of a democracy and market economy. Hungary, the land of the Magyars, was also a land of hope.

But that seems long ago now. The rotating chairmanship of the European Union, which Hungary assumes on Jan. 1, will not represent the culmination of a successful story. In fact, the opposite could be the case. Because of its policies, Budapest could now "be in for some serious problems," Martin Schulz, the parliamentary leader of the Social Democrats in the European Parliament said last Tuesday. Luxembourg Foreign Minister Jean Asselborn went a step further, accusing the Hungarian government of violating "the spirit and text of the EU treaties." "The question arises," he continued, "as to whether such a country deserves to lead the EU. If we don't do anything, it will be very difficult to talk to China or Iran about human rights."

A great deal of anger has been building up. The fact that Prime Minister Viktor Orbán has just cold-bloodedly pushed through a law that muzzles the press, only a few days before he steps onto the pan-European stage, is just the final straw. It has been a last, and possibly decisive step towards autocracy.

No other European politician will have as much power to implement such drastic measures against critical media as Orbán, whose right-wing populist Fidesz Party has a two-thirds majority in parliament. The new, 170-page law attempts to regulate all television and radio stations, newspapers and Internet sites. It even applies to blogs and foreign media available in Hungary.

At the center of the control mechanisms is a new government agency staffed exclusively with Fidesz members. It has the power to impose fines of up to €750,000 ($983,000) for articles with objectionable content -- and it alone will decide what is deemed objectionable. The staff of public media organizations will be placed under government supervision.

Outraged opposition politicians demanded to know how this differs from censorship in the days of former Communist Party General Secretary János Kádár, and demonstratively taped their mouths shut in parliament. Some Hungarian newspapers have published empty front pages in protest at the law.

Government representatives assured critics that the new law would not be applied in a restrictive manner. But when a journalist of government-owned radio station MR1-Kossuth Radio used a minute of silence to protest the change in the treatment of the press, he was suspended.

There are many reasons for Hungary's descent into the ranks of countries that are only partially democratic, but archconservatives and the radical right wing are not the only ones responsible for this adverse development. The Hungarian left has committed a form of gradual suicide. For several parliamentary terms it had the chance to shape Hungary, most recently between 2006 and the spring of 2010. But hopeful steps were quickly abandoned as corruption and nepotism shaped the political scene. Former Prime Minister Ferenc Gyurcsány highlighted the dilemma in a 2006 speech, when he said: "No European country has done something as boneheaded as we have … We have lied in the morning, at noon and at night." It was only the failure of the Socialists that enabled the triumph of the conservative challenger, a seducer of the people.

~ more... ~

Crisis: Greece, Anarchists Call For 'Global Uprising'

(ANSAmed) - ATHENS, DECEMBER 27 - The ''large flames of social uprising'' fanned by the rage of workers and students in Greece, France and Italy is a foretaste of ''the next large-scale global uprising'' against a ''new form of fascism'' of the powers-that-be. These were the words of the imprisoned leaders of the main Greek anarchist-insurrectionary group, Revolutionary Struggle (EA), saying that in this climate of conflict it is necessary to choose ''bankruptcy'' over the ''austerity'' imposed by the EU and the IMF as a tool for national exploitation and liquidation of the latest social victories. This analysis of events by the EA is contained in a letter from jail by Maziotis, Pola Roupa and Costas Gournas, self-declared leaders of the armed group responsible for numerous attacks including the launch of a missile against the US embassy in 2007. In the letter the leaders of the EA - which is believed to have links with the Conspiracy of Cells of Fire, which in November claimed responsibility for letter bombs targeting embassies and international leaders - say that after the US crisis ''in one European city after another millions of people went into the streets to oppose the harsh neo-liberal offensive''. To move forward the fight against pension and education reform, write the three, demonstrations have been organised everywhere, and ''in Greece, Italy, Spain and Ireland there turned into uprisings'', each of which '' feeding the revolt of the other while awaiting a large-scale European-wide social fire''. It is a 'fire' which, under the slogan ''us or them'', meaning us or ''the fascists who govern and control the wealth of society'', write the EA leaders, will lead - beginning from Greece - to the ''next worldwide large-scale uprising''.

Top 25 Censored Stories of The Year

1. Global Plans to Replace the Dollar

2. US Department of Defense is the Worst Polluter on the Planet

3. Internet Privacy and Personal Access at Risk

4. ICE Operates Secret Detention and Courts

5. Blackwater (Xe): The Secret US War in Pakistan

6. Health Care Restrictions Cost Thousands of Lives in US

7. External Capitalist Forces Wreak Havoc in Africa

8. Massacre in Peruvian Amazon over US Free Trade Agreement

9. Human Rights Abuses Continue in Palestine

10. US Funds and Supports the Taliban

11. The H1N1 Swine Flu Pandemic: Manipulating Data to Enrich Drug Companies

12. Cuba Provided the Greatest Medical Aid to Haiti after the Earthquake

13. Obama Cuts Domestic Spending and Increases Military Corporate Welfare

14. Increased Tensions with Unresolved 9/11 Issues

15. Bhopal Water Still Toxic Twenty-five Years After Deadly Gas Leak

16. US Presidents Charged with Crimes Against Humanity as Universal Jurisdiction Dies in Spain

17. Nanotech Particles Pose Serious DNA Risks to Humans and the Environment

18. The True Cost of Chevron

19. Obama Administration Assures World Bank and International Monetary Fund a Free Reign of Abuse

20. Obama's Charter School Policies Spread Segregation and Undermine Unions

21. Western Lifestyle Continues Environmental Footprint

22. 1.2 Billion People in India to be Given Biometric ID Cards

23. Afghan War: Largest Military Coalition in History

24. War Crimes of General Stanley McChrystal

25. Prisoners Still Brutalized at Gitmo