A fascinating article appeared in Rolling Stone magazine in March. Titled “Bank of America: Too Crooked to Fail”, Matt Taibbi’s article cuts through the mystification of official economics and explains a major factor in the 2008 financial crisis. That central cause was fraud, corruption, theft: in short, crime.
This was not just crime in the moral sense, as when we say, “The way capitalists behave ought to be illegal”. As Taibbi lays it out, what Bank of America (BoA) and its subsidiaries did was and is plainly and simply illegal, contrary to the laws of the US capitalist state.
As Taibbi explains, BoA (and others) loaned large sums of money to house buyers who it knew to be poor credit risks. It then combined these dodgy mortgages into “inscrutable financial gizmos” with names like “collateralised debt obligations” (CDOs), proclaimed them AAA quality (meaning the lowest possible risk) and sold them to “unions, pensioners, foreign banks, retirement funds and any other suckers the banks could find”.
To draw in the suckers, BoA promised that it would buy back any of the mortgages that turned out to be defective. Furthermore, it declared that all of the mortgages were insured, so that if the borrower defaulted, the insurance company would reimburse the buyer of the CDO. But when the crunch came in 2008, BoA refused to buy back the shoddy mortgages, and the insurers went bankrupt long before most of the buyers of the CDOs had been repaid.
There is much more, which I couldn’t begin to summarise here: tax evasion, forgery of documents, violation of court orders, repeated frauds of various kinds and outright looting by executives who were not good at anything except enriching themselves. And BoA got away with it all, aside from paying some fines that didn’t begin to match the profits from its crimes. The article is well worth a careful read, and even taking notes on if you have a relative who thinks that corporate executives deserve their inflated payments.
Has something changed?
Taibbi’s Rolling Stone article is only the most thorough and well written I have seen of a number of exposes of banking crimes and excesses associated with the 2008 financial crash. To varying degrees, these articles suggest that the extent of banking corruption and fraud revealed since 2008 represents a significant shift in the character of world, and especially US, capitalism. Is this the case?
We should remember that various forms of robbery have always been intrinsic to capitalism. More than a century ago, the monopolies that were rising to dominate the United States were chastised as “robber barons”. The first scientific study of capitalism, Adam Smith’s The Wealth of Nations, published in 1776, observed: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. Karl Marx’s chapters on “primitive accumulation” in Volume 1 of Capital explain how capitalism was made possible in Britain only by the theft of common land, which turned independent peasants into people who had to sell their labour to survive. The fortunes that became the basis of capitalist production were amassed through the slave trade and piracy.
On the other side of its history, capitalism has done some useful things. In particular, it has vastly increased humanity’s productive powers. If they were used rationally to satisfy human needs instead of to pursue profit, the productive powers developed under capitalism would be sufficient to provide an environmentally sustainable and adequate to abundant life for the entire human race.
This vast increase of productivity largely took place as the capitalist factory system developed beginning in the early 19th century. As capitalism became more productive, the character of profit changed in a significant way. Piracy and theft can transfer large sums of money from one owner to another, but they don’t create any new values: if a pirate has 20 ounces of gold that he didn’t have last year, it’s because other people have lost 20 ounces. The capitalist factory owner of course “robbed” his workers by paying them less than the value they created. But unlike the pirate, the factory owner didn’t seize pre-existing values. To obtain his profits, the capitalist had to put workers to work creating new values. This is why capitalism is so much more productive than other forms of social exploitation.
Robbery, swindling, fraud and so on didn’t cease to occur, but they became relatively less significant and mainly directed at working people; cheating 2000 working people out of 10 minutes’ pay every day for a year would bring in more money than most swindles that could be worked on the wealthy – and without the risk of going to jail.
Overproduction
Capitalism, relying on production for profit, necessarily overproduces. It does this periodically, in the business cycle of boom and bust. And it does so in the longer term, over time building up productive capacity that can’t all be used, or profits that can’t be profitably re-invested. Lenin, in his classic study Imperialism, cited the example of a single factory in Belgium that was capable of supplying the entire world demand for light globes – without even working full time. By the last two decades of the 19th century, the leading capitalist countries had begun to compete for control over the rest of the world, not only for raw materials and markets, but also to obtain spheres where their accumulated capital could be invested profitably and safely.
The long-term stagnation that helped to create imperialism is not as easily overcome as the overproduction of the business cycle, which is on a much smaller scale. The bankruptcy or takeover of an unsuccessful local business is traumatic for those involved, but usually not for the country as a whole. When the competition is global and the competitors are each a major industry within a separate country, the outcome is as likely to be decided by military force as by economics.
The development of imperialism was a sign that capitalism had already outlived its progressive historical role of developing the productive forces. Of course, this does not mean that there were no further increases of productivity. It means that capitalism imposes a greater and greater social cost for such increases. This cost includes two world wars and now the threat – almost the certainty – of catastrophic climate change.
The horrendous destruction of World War II destroyed thousands of factories and created a market for reconstruction and thus the postwar boom. But within a quarter-century, the boom had run out of steam. From the 1973-74 international recession, world capitalism was back into a long-term crisis of overproduction. Internationally, capitalist ruling classes responded to that crisis by an ongoing series of attacks on working-class living standards, but the crisis has not been overcome.
An overproduction crisis means that there are many fewer opportunities than formerly to make profits by producing things. Hence crises, whether cyclical or long term, generally cause an increase of capital trying to make profits in some other way: lending, playing the stock market, running drugs, organising the overthrow of small countries’ governments, swindling, establishing casinos, setting up Ponzi schemes and so on. What all such methods have in common is that they seek to redistribute existing wealth, not to grab a major share of new wealth.
The return to plunder
The longer such stagnation lasts – and the current international stagnation has been around for nearly 30 years – the more capital that is directed into scams of one sort or another, simply because that seems the most likely way to increase one’s capital. So, as the stagnation has dragged on, so also has the tendency for senile capitalism to return to the practices of its childhood, i.e. various forms of theft, even including theft from other capitalists; the easiest way to steal more from workers these days is to plunder their pension funds, but frauds that attract pension fund managers are just as likely to attract managers of capitalists’ funds. (People like Bernard Madoff have no class prejudices: they will steal from anyone.)
I don’t have any statistics that would prove it one way or the other, but the idea that the importance of theft is increasing within US and other imperialist economies certainly fits with the reality of a major long-term crisis of overproduction. It also fits with the way in which the Obama government has dealt with – or rather, not dealt with – major frauds. Bernard Madoff aside (and he had been running his scam for anywhere from 20 to 40 years), nobody is going to jail for committing frauds that involved hundreds of billions of dollars.
Writing on the New Economic Perspectives web site, William K. Black compared the current situation with the US savings and loan (S&L) crisis of the 1980s, in which a speculative loan bubble burst, causing the failure of 747 S&L associations at a cost of US$88 billion. “The worst, most destructive fraudulent CEOs”, Black wrote, “have been allowed to become and remain wealthy through their frauds even though several of them caused greater losses than the entire S&L debacle. The worst fraudulent CEOs who led the prior epidemics of accounting control fraud that drove the S&L debacle and the Enron-era crisis were prosecuted. Not a single elite CEO from Wall Street or the largest fraudulent lenders has even been charged with fraud arising from such loans even though they, collectively, made over two million fraudulent loans in 2006.”
Furthermore, Barack Obama recently signed a bipartisan bill that makes it still easier for corporate crooks to get away with their scams. In another Rolling Stone article, Taibbi analyses the JOBS Act. (Some Wall Street dealers must already be running derivatives on Taibbi’s life expectancy.)
Despite its name, the act has nothing to do with employment. It is supposedly intended to make it easier for new companies to obtain investment. In reality, Taibbi comments, “this law actually appears to have been specifically written to encourage fraud in the stock markets”. Among other things, it allows start-up companies to operate for up to five years without presenting an independent accountant’s report; that is, company executives can say whatever they like about the company’s prospects without fear of being contradicted by a proper study of the numbers. Furthermore, the law explicitly allows company executives, prior to the issuing of an official prospectus, to make presentations to potential investors in which the executives can say anything at all, no matter how false, without being held responsible for it. It is up to the investors to determine whether the prospectus matches what they were told previously.
Do the US Congress and president really want to encourage fraudulent stock offerings? If the question were put to them that way, of course they would answer “No”. But the question is not put to them that way. It is put to them as what corporations say is needed to get money into the stock market, and the corporations mostly realise that you wouldn’t put your money into the stock market these days unless you were tricked into it.
Capital has to seek to expand, and if fraud is the most likely way to expand, so be it. And the more widespread scams become, the more difficult it is to jail the fraudsters, because “everyone does it”. In short, the whole system is both too big and too corrupt to be allowed to fail. Welcome to capitalism’s second childhood.
Direct Action – April 28, 2012