Banks Weren’t Meant to Be Like This

What Would a “Good” Banking System Look Like?
by MICHAEL HUDSON

In medieval times, wealthy bankers lent to kings and princes as their major customers. But now it is the banks that are needy, relying on governments for funding – capped by the post-2008 bailouts to save them from going bankrupt from their bad private-sector loans and gambles.

Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States. 


Joseph Stiglitz characterizes the Obama administration’s vast transfer of money and pubic debt to the banks as a “privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.” Prof. Bill Black describes banks as becoming criminogenic and innovating “control fraud.”  High finance has corrupted regulatory agencies, falsified account-keeping by “mark to model” trickery, and financed the campaigns of its supporters to disable public oversight. The effect is to leave banks in control of how the economy’s allocates its credit and resources.

If there is any silver lining to today’s debt crisis, it is that the present situation and trends cannot continue. So this is not only an opportunity to restructure banking; we have little choice. The urgent issue is who will control the economy: governments, or the financial sector and monopolies with which it has made an alliance.

Fortunately, it is not necessary to re-invent the wheel. Already a century ago the outlines of a productive industrial banking system were well understood. But recent bank lobbying has been remarkably successful in distracting attention away from classical analyses of how to shape the financial and tax system to best promote economic growth – by public checks on bank privileges.

How banks broke the social compact, promoting their own special interests

People used to know what banks did. Bankers took deposits and lent them out, paying short-term depositors less than they charged for risky or less liquid loans. The risk was borne by bankers, not depositors or the government. But today, bank loans are made increasingly to speculators in recklessly large amounts for quick in-and-out trading. Financial crashes have become deeper and affect a wider swath of the population as debt pyramiding has soared and credit quality plunged into the toxic category of “liars’ loans.”

The first step toward today’s mutual interdependence between high finance and government was for central banks to act as lenders of last resort to mitigate the liquidity crises that periodically resulted from the banks’ privilege of credit creation. In due course governments also provided public deposit insurance, recognizing the need to mobilize and recycle savings into capital investment as the industrial revolution gained momentum. In exchange for this support, they regulated banks as public utilities.

Over time, banks have sought to disable this regulatory oversight, even to the point of decriminalizing fraud. Sponsoring an ideological attack on government, they accuse public bureaucracies of “distorting” free markets (by which they mean markets free for predatory behavior). The financial sector is now making its move to concentrate planning in its own hands.

The problem is that the financial time frame is notoriously short-term and often self-destructive. And inasmuch as the banking system’s product is debt, its business plan tends to be extractive and predatory, leaving economies high-cost. This is why checks and balances are needed, along with regulatory oversight to ensure fair dealing. Dismantling public attempts to steer banking to promote economic growth (rather than merely to make bankers rich) has permitted banks to turn into something nobody anticipated. Their major customers are other financial institutions, insurance and real estate – the FIRE sector, not industrial firms. Debt leveraging by real estate and monopolies, arbitrage speculators, hedge funds and corporate raiders inflates asset prices on credit. The effect of creating “balance sheet wealth” in this way is to load down the “real” production-and-consumption economy with debt and related rentier charges, adding more to the cost of living and doing business than rising productivity reduces production costs.

Since 2008, public bailouts have taken bad loans off the banks’ balance sheet at enormous taxpayer expense – some $13 trillion in the United States, and proportionally higher in Ireland and other economies now being subjected to austerity to pay for “free market” deregulation. Bankers are holding economies hostage, threatening a monetary crash if they do not get more bailouts and nearly free central bank credit, and more mortgage and other loan guarantees for their casino-like game. The resulting “too big to fail” policy means making governments too weak to fight back.

The process that began with central bank support thus has turned into broad government guarantees against bank insolvency. The largest banks have made so many reckless loans that they have become wards of the state. Yet they have become powerful enough to capture lawmakers to act as their facilitators. The popular media and even academic economic theorists have been mobilized to pose as experts in an attempt to convince the public that financial policy is best left to technocrats – of the banks’ own choosing, as if there is no alternative policy but for governments to subsidize a financial free lunch and crown bankers as society’s rulers.

The Bubble Economy and its austerity aftermath could not have occurred without the banking sector’s success in weakening public regulation, capturing national treasuries and even disabling law enforcement. Must governments surrender to this power grab? If not, who should bear the losses run up by a financial system that has become dysfunctional? If taxpayers have to pay, their economy will become high-cost and uncompetitive – and a financial oligarchy will rule.

The present debt quandary

The endgame in times past was to write down bad debts. That meant losses for banks and investors. But today’s debt overhead is being kept in place – shifting bad loans off bank balance sheets to become public debts owed by taxpayers to save banks and their creditors from loss. Governments have given banks newly minted bonds or central bank credit in exchange for junk mortgages and bad gambles – without re-structuring the financial system to create a more stable, less debt-ridden economy. The pretense is that these bailouts will enable banks to lend enough to revive the economy by enough to pay its debts.

Seeing the handwriting on the wall, bankers are taking as much bailout money as they can get, and running, using the money to buy as much tangible property and ownership rights as they can while their lobbyists keep the public subsidy faucet running.

The pretense is that debt-strapped economies can resume business-as-usual growth by borrowing their way out of debt. But a quarter of U.S. real estate already is in negative equity – worth less than the mortgages attached to it – and the property market is still shrinking, so banks are not lending except with public Federal Housing Administration guarantees to cover whatever losses they may suffer. In any event, it already is mathematically impossible to carry today’s debt overhead without imposing austerity, debt deflation and depression.

This is not how banking was supposed to evolve. If governments are to underwrite bank loans, they may as well be doing the lending in the first place – and receiving the gains. Indeed, since 2008 the over-indebted economy’s crash led governments to become the major shareholders of the largest and most troubled banks – Citibank in the United States, Anglo-Irish Bank in Ireland, and Britain’s Royal Bank of Scotland. Yet rather than taking this opportunity to run these banks as public utilities and lower their charges for credit-card services – or most important of all, to stop their lending to speculators and gamblers – governments left these banks operating as part of the “casino capitalism” that has become their business plan.

There is no natural reason for matters to be like this. Relations between banks and government used to be the reverse. In 1307, France’s Philip IV (“The Fair”) set the tone by seizing the Knights Templars’ wealth, arresting them and putting many to death – not on financial charges, but on the accusation of devil-worshipping and satanic sexual practices. In 1344 the Peruzzi bank went broke, followed by the Bardi by making unsecured loans to Edward III of England and other monarchs who died or defaulted. Many subsequent banks had to suffer losses on loans gone bad to real estate or financial speculators.

By contrast, now the U.S., British, Irish and Latvian governments have taken bad bank loans onto their national balance sheets, imposing a heavy burden on taxpayers – while letting bankers cash out with immense wealth. These “cash for trash” swaps have turned the mortgage crisis and general debt collapse into a fiscal problem. Shifting the new public bailout debts onto the non-financial economy threaten to increase the cost of living and doing business. This is the result of the economy’s failure to distinguish productive from unproductive loans and debts. It helps explain why nations now are facing financial austerity and debt peonage instead of the leisure economy promised so eagerly by technological optimists a century ago.

So we are brought back to the question of what the proper role of banks should be. This issue was discussed exhaustively prior to World War I. It is even more urgent today.

How classical economists hoped to modernize banks as agents of industrial capitalism

Britain was the home of the Industrial Revolution, but there was little long-term lending to finance investment in factories or other means of production. British and Dutch merchant banking was to extend short-term credit on the basis of collateral such as real property or sales contracts for merchandise shipped (“receivables”). Buoyed by this trade financing, merchant bankers were successful enough to maintain long-established short-term funding practices. This meant that James Watt and other innovators were obliged to raise investment money from their families and friends rather than from banks.

It was the French and Germans who moved banking into the industrial stage to help their nations catch up. In France, the Saint-Simonians described the need to create an industrial credit system aimed at funding means of production. In effect, the Saint-Simonians proposed to restructure banks along lines akin to a mutual fund. A start was made with the Crédit Mobilier, founded by the Péreire Brothers in 1852. Their aim was to shift the banking and financial system away from debt financing at interest toward equity lending, taking returns in the form of dividends that would rise or decline in keeping with the debtor’s business fortunes. By giving businesses leeway to cut back dividends when sales and profits decline, profit-sharing agreements avoid the problem that interest must be paid willy-nilly. If an interest payment is missed, the debtor may be forced into bankruptcy and creditors can foreclose. It was to avoid this favoritism for creditors regardless of the debtor’s ability to pay that prompted Mohammed to ban interest under Islamic law.

Attracting reformers ranging from socialists to investment bankers, the Saint-Simonians won government backing for their policies under France’s Third Empire. Their approach inspired Marx as well as industrialists in Germany and protectionists in the United States and England. The common denominator of this broad spectrum was recognition that an efficient banking system was needed to finance the industry on which a strong national state and military power depended.

Germany develops an industrial banking system

It was above all in Germany that long-term financing found its expression in the Reichsbank and other large industrial banks as part of the “holy trinity” of banking, industry and government planning under Bismarck’s “state socialism.” German banks made a virtue of necessity. British banks “derived the greater part of their funds from the depositors,” and steered these savings and business deposits into mercantile trade financing. This forced domestic firms to finance most new investment out of their own earnings. By contrast, Germany’s “lack of capital … forced industry to turn to the banks for assistance,” noted the financial historian George Edwards. “A considerable proportion of the funds of the German banks came not from the deposits of customers but from the capital subscribed by the proprietors themselves. As a result, German banks “stressed investment operations and were formed not so much for receiving deposits and granting loans but rather for supplying the investment requirements of industry.”

When the Great War broke out in 1914, Germany’s rapid victories were widely viewed as reflecting the superior efficiency of its financial system. To some observers the war appeared as a struggle between rival forms of financial organization. At issue was not only who would rule Europe, but whether the continent would have laissez faire or a more state-socialist economy.

In 1915, shortly after fighting broke out, the Christian Socialist priest-politician Friedrich Naumann published Mitteleuropa, describing how Germany recognized more than any other nation that industrial technology needed long‑term financing and government support. His book inspired Prof. H. S. Foxwell in England to draw on his arguments in two remarkable essays published in the Economic Journal in September and December 1917: “The Nature of the Industrial Struggle,” and “The Financing of Industry and Trade.” He endorsed Naumann’s contention that “the old individualistic capitalism, of what he calls the English type, is giving way to the new, more impersonal, group form; to the disciplined scientific capitalism he claims as German.”

This was necessarily a group undertaking, with the emerging tripartite integration of industry, banking and government, with finance being “undoubtedly the main cause of the success of modern German enterprise,” Foxwell concluded (p. 514). German bank staffs included industrial experts who were forging industrial policy into a science. And in America, Thorstein Veblen’s The Engineers and the Price System(1921) voiced the new industrial philosophy calling for bankers and government planners to become engineers in shaping credit markets.

Foxwell warned that British steel, automotive, capital equipment and other heavy industry was becoming obsolete largely because its bankers failed to perceive the need to promote equity investment and extend long‑term credit. They based their loan decisions not on the new production and revenue their lending might create, but simply on what collateral they could liquidate in the event of default: inventories of unsold goods, real estate, and money due on bills for goods sold and awaiting payment from customers. And rather than investing in the shares of the companies that their loans supposedly were building up, they paid out most of their earnings as dividends – and urged companies to do the same. This short time horizon forced business to remain liquid rather than having leeway to pursue long‑term strategy.

German banks, by contrast, paid out dividends (and expected such dividends from their clients) at only half the rate of British banks, choosing to retain earnings as capital reserves and invest them largely in the stocks of their industrial clients. Viewing these companies as allies rather than merely as customers from whom to make as large a profit as quickly as possible, German bank officials sat on their boards, and helped expand their business by extending loans to foreign governments on condition that their clients be named the chief suppliers in major public investments. Germany viewed the laws of history as favoring national planning to organize the financing of heavy industry, and gave its bankers a voice in formulating international diplomacy, making them “the principal instrument in the extension of her foreign trade and political power.”

A similar contrast existed in the stock market. British brokers were no more up to the task of financing manufacturing in its early stages than were its banks. The nation had taken an early lead by forming Crown corporations such as the East India Company, the Bank of England and even the South Sea Company. Despite the collapse of the South Sea Bubble in 1720, the run-up of share prices from 1715 to 1720 in these joint-stock monopolies established London’s stock market as a popular investment vehicle, for Dutch and other foreigners as well as for British investors. But the market was dominated by railroads, canals and large public utilities. Industrial firms were not major issuers of stock.

In any case, after earning their commissions on one issue, British stockbrokers were notorious for moving on to the next without much concern for what happened to the investors who had bought the earlier securities. “As soon as he has contrived to get his issue quoted at a premium and his underwriters have unloaded at a profit,” complained Foxwell, “his enterprise ceases. ‘To him,’ as the Times says, ‘a successful flotation is of more importance than a sound venture.’”

Much the same was true in the United States. Its merchant heroes were individualistic traders and political insiders often operating on the edge of the law to gain their fortunes by stock-market manipulation, railroad politicking for land giveaways, and insurance companies, mining and natural resource extraction. America’s wealth-seeking spirit found its epitome in Thomas Edison’s hit-or-miss method of invention, coupled with a high degree of litigiousness to obtain patent and monopoly rights.

In sum, neither British nor American banking or stock markets planned for the future. Their time frame was short, and they preferred rent-extracting projects to industrial innovation. Most banks favored large real estate borrowers, railroads and public utilities whose income streams easily could be forecast. Only after manufacturing companies grew fairly large did they obtain significant bank and stock market credit.

What is remarkable is that this is the tradition of banking and high finance that has emerged victorious throughout the world. The explanation is primarily the military victory of the United States, Britain and their Allies in the Great War and a generation later, in World War II.

The regression toward burdensome unproductive debts after World War I

The development of industrial credit led economists to distinguish between productive and unproductive lending. A productive loan provides borrowers with resources to trade or invest at a profit sufficient to pay back the loan and its interest charge. An unproductive loan must be paid out of income earned elsewhere. Governments must pay war loans out of tax revenues. Consumers must pay loans out of income they earn at a job – or by selling assets. These debt payments divert revenue away from being spent on consumption and investment, so the economy shrinks. This traditionally has led to crises that wipe out debts, above all those that are unproductive.

n the aftermath of World War I the economies of Europe’s victorious and defeated nations alike were dominated by postwar arms and reparations debts. These inter-governmental debts were to pay for weapons (by the Allies when the United States unexpectedly demanded that they pay for the arms they had bought before America’s entry into the war), and for the destruction of property (by the Central Powers), not new means of production. Yet to the extent that they were inter-governmental, these debts were more intractable than debts to private bankers and bondholders. Despite the fact that governments in principle are sovereign and hence can annul debts owed to private creditors, the defeated Central Power governments were in no position to do this.

And among the Allies, Britain led the capitulation to U.S. arms billing, captive to the creditor ideology that “a debt is a debt” and must be paid regardless of what this entails in practice or even whether the debt in fact can be paid. Confronted with America’s demand for payment, the Allies turned to Germany to make them whole. After taking its liquid assets and major natural resources, they insisted that it squeeze out payments by taxing its economy. No attempt was made to calculate just how Germany was to do this – or most important, how it was to convert this domestic revenue (the “budgetary problem”) into hard currency or gold. Despite the fact that banking had focused on international credit and currency transfers since the 12^th century, there was a broad denial of what John Maynard Keynes identified as a foreign exchange transfer problem.

Never before had there been an obligation of such enormous magnitude. Nevertheless, all of Germany’s political parties and government agencies sought to devise ways to tax the economy to raise the sums being demanded. Taxes, however, are levied in a nation’s own currency. The only way to pay the Allies was for the Reichsbank to take this fiscal revenue and throw it onto the foreign exchange markets to obtain the sterling and other hard currency to pay. Britain, France and the other recipients then paid this money on their Inter-Ally debts to the United States.

Adam Smith pointed out that no government ever had paid down its public debt. But creditors always have been reluctant to acknowledge that debtors are unable to pay. Ever since David Ricardo’s lobbying for their perspective in Britain’s Bullion debates, creditors have found it their self-interest to promote a doctrinaire blind spot, insisting that debts of any magnitude can and  should be paid. They resist acknowledging a distinction between raising funds domestically (by running a budget surplus) and obtaining the foreign exchange to pay foreign-currency debt. Furthermore, despite the evident fact that austerity cutbacks on consumption and investment can only be extractive, creditor-oriented economists refused to recognize that debts cannot be paid by shrinking the economy. Or that foreign debts and other international payments cannot be paid in domestic currency without lowering the exchange rate.

The more domestic currency Germany sought to convert, the further its exchange rate was driven down against the dollar and other gold-based currencies. This obliged Germans to pay much more for imports. The collapse of the exchange rate was the source of hyperinflation, not an increase in domestic money creation as today’s creditor-sponsored monetarist economists insist. In vain Keynes pointed to the specific structure of Germany’s balance of payments and asked creditors to specify just how many German exports they were willing to take, and to explain how domestic currency could be converted into foreign exchange without collapsing the exchange rate and causing price inflation.

Tragically, Ricardian tunnel vision won Allied government backing. Bertil Ohlin and Jacques Rueff claimed that economies receiving German payments would recycle their inflows to Germany and other debt-paying countries by buying their imports. If income adjustments did not keep exchange rates and prices stable, then Germany’s falling exchange rate would make its exports sufficiently more attractive to enable it to earn the revenue to pay.

This is the logic that the International Monetary Fund followed half a century later in insisting that Third World countries remit foreign earnings and even permit flight capital as well as pay their foreign debts. It is the neoliberal stance now demanding austerity for Greece, Ireland, Italy and other Eurozone economies.

Bank lobbyists claim that the European Central Bank will risk spurring domestic wage and price inflation if it does what central banks were founded to do: finance budget deficits. Europe’s financial institutions are given a monopoly right to perform this electronic task – and to receive interest for what a real central bank could create on its own computer keyboard.

But why it is less inflationary for commercial banks to finance budget deficits than for central banks to do this? The bank lending that has inflated a global financial bubble since the 1980s has left as its legacy a debt overhead that can no more be supported today than Germany was able to carry its reparations debt in the 1920s. Would government credit have so recklessly inflated asset prices?

How debt creation has fueled asset-price inflation since the 1980s

Banking in recent decades has not followed the productive lines that early economic futurists expected. As noted above, instead of financing tangible investment to expand production and innovation, most loans are made against collateral, with interest to be paid out of what borrowers can make elsewhere. Despite being unproductive in the classical sense, it was remunerative for debtors from 1980 until 2008 – not by investing the loan proceeds to expand economic activity, but by riding the wave of asset-price inflation. Mortgage credit enabled borrowers to bid up property prices, drawing speculators and new customers into the market in the expectation that prices would continue to rise. But hothouse credit infusions meant additional debt service, which ended up shrinking the market for goods and services.

Under normal conditions the effect would have been for rents to decline, with property prices following suit, leading to mortgage defaults. But banks postponed the collapse into negative equity by lowering their lending standards, providing enough new credit to keep on inflating prices. This averted a collapse of their speculative mortgage and stock market lending. It was inflationary – but it was inflating asset prices, not commodity prices or wages. Two decades of asset price inflation enabled speculators, homeowners and commercial investors to borrow the interest falling due and still make a capital gain.

This hope for a price gain made winning bidders willing to pay lenders all the current income – making banks the ultimate and major rentierincome recipients. The process of inflating asset prices by easing credit terms and lowering the interest rate was self-feeding. But it also was self-terminating, because raising the multiple by which a given real estate rent or business income can be “capitalized” into bank loans increased the economy’s debt overhead.

Securities markets became part of this problem. Rising stock and bond prices made pension funds pay more to purchase a retirement income – so “pension fund capitalism” was coming undone. So was the industrial economy itself. Instead of raising new equity financing for companies, the stock market became a vehicle for corporate buyouts. Raiders borrowed to buy out stockholders, loading down companies with debt. The most successful looters left them bankrupt shells. And when creditors turned their economic gains from this process into political power to shift the tax burden onto wage earners and industry, this raised the cost of living and doing business – by more than technology was able to lower prices.

The EU rejects central bank money creation, leaving deficit financing to the banks

Article 123 of the Lisbon Treaty forbids the ECB or other central banks to lend to government. But central banks were created specifically – to finance government deficits. The EU has rolled back history to the way things were three hundred years ago, before the Bank of England was created. Reserving the task of credit creation for commercial banks, it leaves governments without a central bank to finance the public spending needed to avert depression and widespread financial collapse.

So the plan has backfired. When “hard money” policy makers limited central bank power, they assumed that public debts would be risk-free. Obliging budget deficits to be financed by private creditors seemed to offer a bonanza: being able to collect interest for creating electronic credit that governments can create themselves. But now, European governments need credit to balance their budget or face default. So banks now want a central bank to create the money to bail them out for the bad loans they have made.

For starters, the ECB’s €489 billion in three-year loans at 1% interest gives banks a free lunch arbitrage opportunity (the “carry trade”) to buy Greek and Spanish bonds yielding a higher rate. The policy of buying government bonds in the open market – after banks first have bought them at a lower issue price – gives the banks a quick and easy trading gain.

How are these giveaways less inflationary than for central banks to directly finance budget deficits and roll over government debts? Is the aim of giving banks easy gains simply to provide them with resources to resume the Bubble Economy lending that led to today’s debt overhead in the first place?

Conclusion

Governments can create new credit electronically on their own computer keyboards as easily as commercial banks can. And unlike banks, their spending is expected to serve a broad social purpose, to be determined democratically. When commercial banks gain policy control over governments and central banks, they tend to support their own remunerative policy of creating asset-inflationary credit – leaving the clean-up costs to be solved by a post-bubble austerity. This makes the debt overhead even harder to pay – indeed, impossible.

So we are brought back to the policy issue of how public money creation to finance budget deficits differs from issuing government bonds for banks to buy. Is not the latter option a convoluted way to finance such deficits – at a needless interest charge? When governments monetize their budget deficits, they do not have to pay bondholders.

I have heard bankers argue that governments need an honest broker to decide whether a loan or public spending policy is responsible. To date their advice has not promoted productive credit. Yet they now are attempting to compensate for the financial crisis by telling debtor governments to sell off property in their public domain. This “solution” relies on the myth that privatization is more efficient and will lower the cost of basic infrastructure services. Yet it involves paying interest to the buyers of rent-extraction rights, higher executive salaries, stock options and other financial fees.

Most cost savings are achieved by shifting to non-unionized labor, and typically end up being paid to the privatizers, their bankers and bondholders, not passed on to the public. And bankers back price deregulation, enabling privatizers to raise access charges. This makes the economy higher cost and hence less competitive – just the opposite of what is promised.

Banking has moved so far away from funding industrial growth and economic development that it now benefits primarily at the economy’s expense in a predator and extractive way, not by making productive loans. This is now the great problem confronting our time. Banks now lend mainly to other financial institutions, hedge funds, corporate raiders, insurance companies and real estate, and engage in their own speculation in foreign currency, interest-rate arbitrage, and computer-driven trading programs. Industrial firms bypass the banking system by financing new capital investment out of their own retained earnings, and meet their liquidity needs by issuing their own commercial paper directly. Yet to keep the bank casino winning, global bankers now want governments not only to bail them out but to enable them to renew their failed business plan – and to keep the present debts in place so that creditors will not have to take a loss.

This wish means that society should lose, and even suffer depression. We are dealing here not only with greed, but with outright antisocial behavior and hostility.

Europe thus has reached a critical point in having to decide whose interest to put first: that of banks, or the “real” economy. History provides a wealth of examples illustrating the dangers of capitulating to bankers, and also for how to restructure banking along more productive lines. The underlying questions are clear enough:

• Have banks outlived their historical role, or can they be restructured to finance productive capital investment rather than simply inflate asset prices?
• Would a public option provide less costly and better directed credit?
• Why not promote economic recovery by writing down debts to reflect the ability to pay, rather than relinquishing more wealth to an increasingly aggressive creditor class?

Solving the Eurozone’s financial problem can be made much easier by the tax reforms that classical economists advocated to complement their financial reforms. To free consumers and employers from taxation, they proposed to levy the burden on the “unearned increment” of land and natural resource rent, monopoly rent and financial privilege. The guiding principle was that property rights in the earth, monopolies and other ownership privileges have no direct cost of production, and hence can be taxed without reducing their supply or raising their price, which is set in the market. Removing the tax deductibility for interest is the other key reform that is needed.

A rent tax holds down housing prices and those of basic infrastructure services, whose untaxed revenue tends to be capitalized into bank loans and paid out in the form of interest charges. Additionally, land and natural resource rents – along with interest – are the easiest to tax, because they are highly visible and their value is easy to assess.

Pressure to narrow existing budget deficits offers a timely opportunity to rationalize the tax systems of Greece and other PIIGS countries in which the wealthy avoid paying their fair share of taxes. The political problem blocking this classical fiscal policy is that it “interferes” with the rent-extracting free lunches that banks seek to lend against. So they act as lobbyists for untaxing real estate and monopolies (and themselves as well). Despite the financial sector’s desire to see governments remain sufficiently solvent to pay bondholders, it has subsidized an enormous public relations apparatus and academic junk economics to oppose the tax policies that can close the fiscal gap in the fairest way.

It is too early to forecast whether banks or governments will emerge victorious from today’s crisis. As economies polarize between debtors and creditors, planning is shifting out of public hands into those of bankers. The easiest way for them to keep this power is to block a true central bank or strong public sector from interfering with their monopoly of credit creation. The counter is for central banks and governments to act as they were intended to, by providing a public option for credit creation.

The Fascinating Scientific Reason Why "Money Doesn't Buy Happiness"

By David McRaney, You Are Not So Smart
Posted on January 25, 2012

The Misconception: There is nothing better in the world than getting paid to do what you love.

The Truth: Getting paid for doing what you already enjoy will sometimes cause your love for the task to wane because you attribute your motivation as coming from the reward, not your internal feelings.

Money isn’t everything. Money can’t buy happiness. Don’t live someone else’s dream. Figure out what you love and then figure out how to get paid doing it.

Maxims like these often find their way into your social media; they arrive in your electronic mailbox at the ends of dense chains of forwards. They bubble up from the collective sighs of well-paid boredom around the world and get routinely polished for presentation in graduation speeches and church sermons.

Money, fame, and prestige – they dangle just outside your reach it seems, encouraging you to lean farther and farther over the edge, to study longer and longer, to work harder and harder. When someone reminds you that acquiring currency while ignoring all else shouldn’t be your primary goal in life, it feels good. You retweet it. You post it on your wall. You forward it, and then you go back to work.

If only science had something concrete to say about the whole thing, you know? All these living greeting cards dispensing wisdom are great and all, but what about really putting money to the test? Does money buy happiness? In 2010, scientists published the results of a study looking into that very question.

The research by Daniel Kahneman and Angus Deaton, published in the Proceedings of the National Academy of Sciences, analyzed the lives and incomes of nearly half-a-million randomly selected U.S. citizens. They dug through the subjects’ lives searching for indicators of something psychologists call “emotional well being,” a clinical term for how often you feel peaks and valleys like “joy, stress, sadness, anger and affection” and to what degree you feel those things daily. In other words, they measured how happy or sad people were over time compared to how much cash they brought home. They did this by checking if the subjects were consistently able to experience the richness of existence, by whether they were tasting the poetic marrow of life.

The researchers discovered money is indeed a major factor in day-to-day happiness. No surprise there. You need to make a certain amount, on average, to be able to afford food, shelter, clothing, entertainment and the occasional Apple product, but what spun top hats around the country was their finding that beyond a certain point your happiness levels off. The happiness money offers doesn’t keep getting more and more potent – it plateaus. The research showed that a lack of money brings unhappiness, but an overabundance does not have the opposite effect.

According to the research, in modern America the average income required to be happy day-to-day, to experience “emotional well being” is about $75,000 a year. According to the researchers, past that point adding more to your income “does nothing for happiness, enjoyment, sadness, or stress.” A person who makes, on average, $250,000 a year has no greater emotional well-being, no extra day-to-day happiness, than a person making $75,000 a year. In Mississippi it is a bit less, in Chicago a bit more, but the point is there is evidence for the existence of a financiohappiness ceiling. The super-wealthy may believe they are happier, and you may agree, but you both share a delusion.

If you don’t already have it, money can improve your life and make you happier, but once you have enough to go to Red Lobster on Tuesday night without worrying about paying the water bill that month, you’re good to go. Or, as Henry David Thoreau once said, “A man is rich in proportion to the number of things which he can afford to let alone.” In the modern United States the ability to let most things alone, according to Kahneman and Deaton’s research, costs about $75,000 a year.

If you find that hard to believe, you aren’t alone. A study in 2011 at Cornell asked Americans which they would rather have, more money or more sleep. Most people said more money. In a choice between either $80,000 a year, normal work hours, and about eight hours of sleep a night versus $140,000 a year, routine overtime, and six hours of nightly dreams – the majority of people went with the cash. It’s unfortunate, because although it looks good on paper and feels right in your gut, the research has never agreed. No matter how you turn it, the science says once your basic needs are taken care of, money and other rewards don’t make you happier, and you can appreciate why after examining a psychological jewel called the overjustification effect. To understand it, we must travel to 1973 when a group of psychologists poisoned a few children’s love of drawing in the name of science.

Throughout the 20th century, as psychology came into its own as a scientific discipline, many psychologists emerged from the halls of academia and ascended to the rank of celebrity after delivering open-palmed scientific slaps to the face of mankind. Sigmund Freud got people talking about the unconscious and the malleable, hidden world of desires and fears. Carl Jung put the ideas of archetypes, introversion, and extroversion into our vocabulary. Abraham Maslow gave us a hierarchy of needs including hugs and sex. Timothy Leary fed Harvard students psychedelic mushrooms and advocated that an entire generation should use LSD to “turn on, tune in, and drop out.” There are many more, but in the 1970s, B.F. Skinner was the rock star of psychology.

Skinner and his boxes made the cover of Time magazine in 1971 underneath the ominous proclamation, “We Can’t Afford Freedom.” His research into behaviorism had made its way into the public consciousness, and he was intent on using his celebrity to convince all of humanity there was no such thing as free will. You’ve seen his findings in practice. The Supernanny and The Dog Whisperer reward desired behavior and either punish or ignore undesired behavior – and they get impressive results. Skinner could make birds do figure eights on his command, or train them to pilot guided missiles. He invented climate-controlled baby boxes in which infants never cried. He created teaching machines that still influence user interfaces today. But, he also scared a romantic generation of freedom seekers into thinking freedom might be an illusion.

Skinner said all human thoughts and behaviors were just reactions to stimuli – conditioned responses. To believe as Skinner did is to believe everything you do is part of seeking a reward or avoiding a punishment. Your entire life is just a stack of evolutionarily selected against quirks and desires seasoned with programmed interests and fears. There is no self. There is no one in control. Those things are illusions, side effects of a complex nervous system observing its own actions and cognitions. In light of this, Skinner advocated we build a society through setting goals and then condition people toward those goals through positive reinforcement. Skinner didn’t trust human beings not to be lazy, greedy, and violent. Humans, he said, were inclined to seek and reinforce status through institutions, class warfare, and bloodshed. People can’t be trusted with freedom, he told the world. Psychology could instead design systems to condition people toward positive goals that ensure the best possible quality of life for all.

As you might imagine, the proclamation humans have no soul, or at least no special spark, caused a great deal of mental indigestion. Many psychologists resisted the idea that you are nothing more than chemical reactions on top of physical laws playing themselves out no differently than a rock slide crashing down the side of a mountain or a tree converting sunlight and carbon dioxide into wood. Skinner claimed what goes on inside your head is irrelevant, that the environment, the stuff outside your skull determines behavior, thoughts, emotions, beliefs and so on. It was a bold and terrifying claim to many, so science set about the task of picking it apart.

Among those who wanted to know if the mind was just a pile of reactions to rewards and punishments were psychologists Mark Lepper, Daniel Greene and Richard Nisbett. They wondered if thinking about thinking played a bigger role than the behaviorists suggested. In their book, The Hidden Costs of Reward, they detail one experiment in particular which helped pull psychology out from under what they called Skinner’s “long shadow.”

In 1973, Lepper, Greene and Nisbett met with teachers of a preschool class, the sort that generates a steady output of macaroni art and paper-bag vests. They arranged for the children to have a period of free time in which the tots could choose from a variety of different fun activities. Meanwhile, the psychologists would watch from behind a one-way mirror and take notes. The teachers agreed, and the psychologists watched. To proceed, they needed children with a natural affinity for art. So as the kids played, the scientists searched for the ones who gravitated toward drawing and coloring activities. Once they identified the artists of the group, the scientists watched them during free time and measured their participation and interest in drawing for later comparison.

They then divided the children into three groups. They offered Group A a glittering certificate of awesomeness if the artists drew during the next fun time. They offered Group B nothing, but if the kids in Group B happened to draw they received an unexpected certificate of awesomeness identical to the one received by Group A. The experimenters told Group C nothing ahead of time, and later the scientists didn’t award a prize if those children went for the colored pencils and markers. The scientists then watched to see how the kids performed during a series of playtimes over three days. They awarded the prizes, stopped observations, and waited two weeks. When they returned, the researchers watched as the children faced the same the choice as before the experiment began. Three groups, three experiences, many fun activities – how do you think their feelings changed?

Well, Group B and Group C didn’t change at all. They went to the art supplies and created monsters and mountains and houses with curly-cue smoke streams crawling out of rectangular chimneys with just as much joy as they had before they met the psychologists. Group A, though, did not. They were different people now. The children in Group A “spent significantly less time” drawing than did the others, and they “showed a significant decrease in interest in the activity” as compared to before the experiment. Why?

The children in Group A were swept up, overpowered, their joy perverted by the overjustification effect. The story they told themselves wasn’t the same story the other groups were telling. That’s how the effect works.

Self-perception theory says you observe your own behavior and then, after the fact, make up a story to explain it. That story is sometimes close to the truth, and sometimes it is just something nice that makes you feel better about being a person. For instance, researchers at Stanford University once divided students into two groups. One received a small cash payment for turning wooden knobs round and round for an hour. The other group received a generous payment for the same task. After the hour, a researcher asked students in each group to tell the next person after them who was about to perform the same boring task that turning knobs was fun and interesting. After that, everyone filled out a survey in which they were asked to say how they truly felt. The people paid a pittance reported the study was a blast. The people paid well reported it was awful. Subjects in both groups lied to the person after them, but the people paid well had a justification, an extrinsic reward to fall back on. The other group had no safety net, no outside justification, so they invented one inside. To keep from feeling icky, they found solace in an internal justification – they thought, “you know, it really was fun when you think about.” That’s called the insufficient justification effect, the yang to overjustification’s yin. In telling themselves the story, the only difference was the size of the reward and whether or not they felt extrinsically or intrinsically motivated. You are driven at the fundamental level in most everything you choose to do by either intrinsic or extrinsic goals.

Intrinsic motivations come from within. As Daniel Pink explained in his excellent book, Drive, those motivations often include mastery, autonomy, and purpose. There are some things you do just because they fulfill you, or they make you feel like you are becoming better at a task, or that you are a master of your destiny, or that you play a role in the grand scheme of things, or that you are helping society in some way. Intrinsic rewards demonstrate to yourself and others the value of being you. They are blurry and difficult to quantify. Charted on a graph, they form long slopes stretching into infinity. You strive to become an amazing cellist, or you volunteer in the campaign of an inspiring politician, or you build the starship Enterprise in Minecraft.

Extrinsic motivations come from without. They are tangible baubles handed over for tangible deeds. They usually exist outside of you before you begin a task. These sorts of motivations include money, prizes and grades, or in the case of punishment, the promise of losing something you like or gaining something you do not. Extrinsic motivations are easy to quantify, and can be demonstrated in bar graphs or tallied on a calculator. You work a double shift for the overtime pay so you can make rent. You put in the hours to become a doctor hoping your father will finally deliver the praise for which you long. You say no to the cheesecake so you can fit into those pants at the Christmas party. If you can admit to yourself that the reward is the only reason you are doing what you are doing – the situps, the spreadsheet, the speed limit – it is probably extrinsic.

Whether a reward is intrinsic or extrinsic helps determine the setting of your narrative – the marketplace or the heart. As Dan Ariely writes in his book, Predictably Irrational, you tend to unconsciously evaluate your behavior and that of others in terms of social norms or market norms. Helping a friend move for free doesn’t feel the same as helping a friend move for $50. It feels wonderful to slip into the same bed with your date after getting to know them and staying up one night making key lime cupcakes and talking about the differences and similarities between Breaking Bad and The Wire, but if after all of that the other person tosses you a $100 bill and says, “Thanks, that was awesome,” you will feel crushed by the terrible weight of market norms. Payments in terms of social norms are intrinsic, and thus your narrative remains impervious to the overjustification effect. Those sorts of payments come as praise and respect, a feeling of mastery or camaraderie or love. Payments in terms of market norms are extrinsic, and your story becomes vulnerable to overjustification. Marketplace payments come as something measurable, and in turn they make your motivation measurable when before it was nebulous, up for interpretation and easy to rationalize.

The deal the children struck with the experimenters ruined their love of art during playtime, not because they received a reward. After all, Group B got the same reward and kept their desire to draw. No, it wasn’t the prize but the story they told themselves about why they chose what they chose, why they did what they did. During the experiment, Group C thought, “I just drew this picture because I love to draw!” Group B thought, “I just got rewarded for doing something I love to do!” Group A thought, “I just drew this to win an award!” When all three groups were faced with the same activity, Group A was faced with a metacognition, a question, a burden unknown to the other groups. The scientists in the knob-turning study and the child artists study showed Skinner’s view was too narrow. Thinking about thinking changes things. Extrinsic rewards can steal your narrative.

As Lepper, Greene and Nisbett wrote, “engagement in an activity of initial interest under conditions that make salient to the person the instrumentality of engagement in that activity as a means to some ulterior end may lead to decrements in subsequent, intrinsic interest in the activity.” In other words, if you are offered a reward to do something you love and then agree, you will later question whether you continue to do it for love or for the reward.

In 1980, David Rosenfield, Robert Folger and Harold Adelman at Southern Methodist University revealed a way you can defeat the overjustification effect. Seek employers who dole out reward – paychecks, bonuses, promotions, etc. – based not on quotas or task completions but instead based on competence. They ran an experiment in which they told subjects the goal was to find fun and interesting ways to improve vocabulary skills in schools. They placed participants in two categories and two groups per category. In one category, subjects would be paid for being good at their task. In the other category, the subjects would be paid for completing a task. The subjects received 26 dice with letters on their faces instead of dots and a stack of index cards each with 13 random letters. The subjects hit a timer and used their dice to make words from the letters on the cards. Once they had used nine letters or spent a minute-and-a-half trying, they moved on to the next index card and kept repeating until the experiment ended. It was difficult but fun, and as the players kept going they started to improve in their abilities.

In the payment for competence category, Group A was told they were being payed based on how well they did compared to the average score. In Group B, the subjects were told the same thing, but there was no mention of any reward. In the payment for completion category, the scientists told Group C each completed puzzle would increase their payout, and Group D was told they would be paid by the hour.

After the games, the experimenters pretended to tally up the subjects’ scores and showed Groups A and B how well they did. No matter how they actually performed, the scientists told half of Groups A and B they did poorly and half they were amazing at the game. Groups C and D, the ones who were paid for completions, were also split. Half got low pay and half high pay. The subjects then filled out a questionnaire and sat alone in the room with the dice and cards for three minutes. During that alone time the real study began. The scientists wanted to see who would keep playing the game for fun and for how long.

The people in Groups A and B, the ones who were paid for being better than average, they picked up the game and played it for over two minutes, but slightly less than that if they were told they weren’t that good. The people in groups C and D, the ones paid for completions, didn’t play it for fun for as long as did the people in the competency groups, and they tended to play longer the less they were paid.

The results of the study suggested when you get rewarded based on how well you perform a task, as long as those reasons are made perfectly clear, rewards will generate that electric exuberance of intrinsic validation, and the higher the reward, the better the feeling and the more likely you will try harder in the future. On the other hand, if you are getting rewarded just for being a warm body, no matter how well you do your job, no matter what you achieve, the electric feeling is absent. In those conditions greater rewards don’t lead to more output, don’t encourage you to strive for greatness. Overall, the study suggested rewards don’t have motivational power unless they make you feel competent. Money alone doesn’t do that. With money, when you explain to yourself why you worked so hard, all you can come up with is, “to get paid.” You come to believe you are being coerced, paid off, bought out. In the absence of what the scientists called “competency feedback” there is no story to tell yourself that paints you as a badass. Quotas and overtime and hourly pay don’t offer such indications of competency. Bonuses based on a reaching a specific number of completions or reaching a quantified goal make you feel like a machine.

If you pay people to complete puzzles instead of paying them for being smart, they lose interest in the game. If you pay children to draw, fun becomes work. Payment on top of compliments and other praise and feeling good about personal achievement are powerful motivators, but only if they are unexpected. Only then can you continue to tell the story that keeps you going; only then can you still explain your motivation as coming from within.

Consider the story you tell yourself about why you do what you do for a living. How vulnerable is that tale to these effects?

Maybe your story goes like this: Work is just a means to an end. You go to work; you get paid. You exchange effort for survival tokens and the occasional steampunk thong from Etsy. Work is not fun. Work pays bills. Fun happens at places that are not work. Your story is in no danger if that’s how you see things. In an environment like that Skinner’s assumptions hold true, you will only work as hard as is necessary to keep getting paychecks. If offered greater rewards, you’ll work harder for them.

Maybe your story goes like this though: I love what I do. It changes lives. It makes the world a better place. I am slowly becoming a master in my field, and I get to choose how I solve problems. My bosses value my efforts, depend on me, and offer praise. In that scenario, rewards just get in the way of your job. As Kahneman’s and Deaton’s study about happiness showed, once you earn enough to be happy day-to-day, motivation must come from something else. As Kahneman and Deaton’s research into happiness and money showed, the only material reward worth seeking once you have a bed, running water and access to microwave popcorn, are tributes, symbols to all of your merit, stuff that demonstrates your effectance to yourself and others. Ranks, degrees, gold stars, trophies, Nobel Prizes and Academy Awards – these are shorthand indicators of your competence. Those rewards amplify your internal motivations; they build your self-esteem and strengthen your feelings of self-efficacy. They show you’ve leveled up in the real world. Achievement unlocked. They help you construct a personal narrative you enjoy telling.

The overjustification effect threatens your fragile narratives, especially if you haven’t figured out what to do with your life. You run the risk of seeing your behavior as motivated by profit instead of interest if you agree to get paid for something you would probably do for free. Conditioning will not only fail, it will pollute you. You run the risk of believing the reward, not your passion, was responsible for your effort, and in the future it will be a challenge to generate enthusiasm. It becomes more and more difficult to look back on your actions and describe them in terms of internal motivations. The thing you love can become drudgery if that which can’t be measured is transmuted into something you can plug into TurboTax.

Apple Driving Workers to Threaten Mass Suicide?

The Pathologies of the Modern Corporation
By Robert Cruickshank, AlterNet
January 26, 2012

Here in my household, we are swimming in Apple products. We have four iPhones, although only three of them are currently in use. We have an iPod and an iPad. We have a MacBook and a MacBook Air (on which this post is currently being composed). We have two iBooks in storage, along with my iMac, which dates to the summer of 2000. It still boots up and works just fine.

I’m not an Apple fanboy. I just prefer products that work well, rarely ever crash, and help me create value. Apple products meet those needs perfectly, whereas most PCs I’ve used simply don't.

If those were the only things I cared about in life, I wouldn’t give those products a second thought. But there’s more to life than a functional piece of consumer electronics. Those items should exist to help me do the things in life that I want to do, to help me live a better life. They’re tools, not ends.

Even that’s not sufficient. One of my main goals in life is to build a better world, to ease suffering, end oppression, and provide equality – all in order that others may have the freedom to pursue their own dreams. A well-designed product can certainly help that process along. But what if the way that product is made actually undermines those broader goals? Suddenly, there’s a problem.

In the last year or two, it’s become increasingly clear that the way Apple makes its products is deeply flawed. Working conditions at the factory which makes most of their products – Foxconn in Shenzhen, China – are so appalling that workers engaged in a rash of suicides in 2010 to ameliorate their own suffering. Earlier this year workers threatened mass suicide over pay and working conditions. And of course, there’s the fact that Apple makes these products overseas rather than in the United States, where unemployment remains at some of the highest levels we’ve seen since the Great Depression.

Here in the 21st century, it should be clear to us that better technology is not sufficient to build the kind of better lives and society that we want. If it were, we wouldn’t be in a position of mass unemployment, widespread suffering, and a democracy in decay. Social institutions, including workplaces and corporations, have to be full partners in building a democratic, empowered, and equal society.

Most corporations, however, don’t see themselves that way – including Apple. Today’s New York Times took a look at Apple, America And A Squeezed Middle Class, curious to see why Apple no longer manufactures its products in the US and what the impact is on our prosperity. They found that Apple builds in China in large part because they have a narrow focus on their products and their profits, and disdain wider concerns for the good of society. When an unnamed Apple executive was asked about their role in addressing America’s economic problems, their response was revealing:

They say Apple’s success has benefited the economy by empowering entrepreneurs and creating jobs at companies like cellular providers and businesses shipping Apple products. And, ultimately, they say curing unemployment is not their job. 

“We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.”

That quote is perhaps the best encapsulation of the pathologies of the modern American corporation. In fact, Apple does have an obligation to solve America’s problems. Everyone who lives in this country has that obligation. And corporations have that obligation too. If they don’t want to help make things better, then they shouldn’t exist.

The notion that companies exist only to generate profit or build a specific few set of products is corrosive. Those profits and products serve the rest of society. And as a part of that society, companies and their executives exist to make that society a better place. If they are engaged in a set of practices that make society worse off, then those actions are indefensible and need to be changed.

For the last 30 years, American businesses have been devoted to a single-minded pursuit of maximizing short-term profits. Unsurprisingly, this has had profound ripple effects throughout the rest of society. The economy became focused on those profits, and so with it followed politics, culture, and our values as a civilization.

By now it should be clear to everybody that while this works well for the small elite that has hoarded all these profits – the so-called “1%” – it has utterly failed to provide a happy and fulfilled life for everyone else.

This is true not only of the American workers who have lost their jobs due to outsourcing, it’s true of the workers around the world who have those jobs now. Those workers aren’t villains – if anything they’re even worse off. Foxconn’s chairman not only compared his workforce to animals, he suggested he might learn good management techniques from a Taiwanese zoo.

The NYT article talks about one of the reasons Apple likes Foxconn is because the factory is willing to push its workers not just to the breaking point, but well beyond it, in service to Apple’s profits and product demands. The NYT article described Steve Jobs’ 2007 rant about the iPhone needing an unscratchable glass surface within six weeks, and how Foxconn went about fulfilling that need:

In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.

Was that necessary? Certainly not. That might not sound as bad as other reported abuses, but the situation is likely much worse at Apple’s suppliers, with overwork and other forms of employment fraud being rampant. 

As William K. Black explains at Alternet, this is a good example of what may be a widespread tolerance for fraud in the global economy:

These frauds take place abroad, but they harm employees at home. Mitt Romney explains that Bain had to slash wages and pensions to save firms located in the U.S. who had to meet competition from foreign anti-employee control frauds. The damage from foreign anti-employee control frauds drives the domestic attack on U.S. manufacturing wages. Bad ethics increasingly drive good ethics out of the markets and manufacturing jobs out of the U.S. and into more fraud-friendly nations.

One only needs to look at the widespread fraud that underlay the housing bubble of the ’00s to see further evidence for these claims.

Apple likes to think of itself as a model corporation. But as we saw above, their attitude is the same as that of many other businesses – that only the product and the profits matter, with all other elements of human life and social good being unimportant. The NYT article implicitly endorses this view by framing Apple’s decisions as being driven by the marketplace:

It is hard to estimate how much more it would cost to build iPhones in the United States. However, various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.

In fact, the article explains that Apple is the world’s most profitable company, so clearly there is room to give. I would personally pay $65 more per iPhone if I knew it was going to American workers. I’m an internationalist, and so I’m also willing to pay more if I knew it was going to create better pay and better working conditions for the Foxconn workers in Shenzhen.

The NYT suggests that it’s not just profit motive that drives Apple’s unwillingness to bring jobs back to the States, but the lack of a skilled workforce and existing factory capacity:

But such calculations are, in many respects, meaningless because building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility. Other companies that work with Apple, like Corning, also say they must go abroad.

The NYT treats this as a kind of historic accident, a consequence of the marketplace. But it is in fact the product of 30 years of deliberate American government policy to deskill our workforce and send their jobs overseas so that the top 1% of our society can enjoy greater profits.

Nowhere in the article is the notion of an “industrial policy” described. China spends vast sums of money to develop, promote and protect its manufacturing sector. The United States has not only done no such thing, at least not since 1980, but has instead spent its money and used its laws and policies to encourage the deindustrialization of this country. This is not a market failure but a deliberate outcome of specific political choices.

There is nothing stopping the United States from shifting our current industrial policy away from “doing everything we can to help the 1% get richer” and toward “doing everything we can to promote the development of a manufacturing sector that employs a lot of people, paying good wages with good working conditions.” Well, nothing except the political power of the 1% – and the hegemony of neoliberal ideology, which holds that “the market” should decide who wins and who loses in life, rather than all of us collectively deciding that there’s no reason anyone should ever have to “lose” at all.

The United States could and should spend money to provide job training to help create a workforce that can build the products that make a 21st century society go. We can and should spend money to help make it easier to build sustainable, environmentally responsible factories. We can and should pass laws to ensure those factories are run by a democratic workforce, ideally by a cooperative, rather than by a large corporation focused on profits rather than the social good.

If companies are complaining about costs, we can help solve that problem without letting them fall back on the extremely damaging “solution” of simply cutting their workers’ pay, benefits, or even their jobs. Universal health care, funded through taxation, would mean a company like Apple would not have to include that cost in deciding when and where to hire. The same holds true of universal defined-benefit pensions – an augmented version of Social Security – as well as better schools and a freight and passenger transportation infrastructure that was not dependent on expensive oil.

Those things would not necessarily have to benefit just large corporations. They could provide the basis for people to innovate for themselves, for cooperatives to start setting up shop in the US and begin to design and build things like smartphones.

Changes to the way our companies operate, including eliminating the laws requiring them to maximize shareholder value and instead focus on operating in a way that makes society better, are also key pieces of building a better 21st century prosperity.

If all we want out of life is an iPhone, then we can just continue on the present path. But for those of us who know we can and should aspire to much more fulfilling things, it’s time we started figuring out how to change the global economy, rather than let it continue undermining our values and our lives. 

No Fracking Way! Industry Says Word 'Frack' Has Been Co-Opted

Thursday, January 26, 2012 by Common Dreams
"It's Madison Avenue hell"

"Hydraulic fracturing" is more commonly known as "fracking."

During this week's State of the Union address, President Obama said:

"It was public research dollars, over the course of thirty years, that helped develop the technologies to extract all this natural gas out of shale rock, reminding us that Government support is critical in helping businesses get new energy ideas off the ground."

But he never said the F-word, no doubt pleasing industry lobbyists.

From the Associated Press:

“When you hear the word ‘fracking,’ what lights up your brain is the profanity,” says Deborah Mitchell, who teaches marketing at the University of Wisconsin’s School of Business. “Negative things come to mind.”

But the real profanity is fracking itself. Ellen Cantarow writing on Common Dreams Monday:

Fracking uses prodigious amounts of water laced with sand and a startling menu of poisonous chemicals to blast the methane out of the shale. At hyperbaric bomb-like pressures, this technology propels five to seven million gallons of sand-and-chemical-laced water a mile or so down a well bore into the shale.

Up comes the methane -- along with about a million gallons of wastewater containing the original fracking chemicals and other substances that were also in the shale, among them radioactive elements and carcinogens. There are 400,000 such wells in the United States. Surrounded by rumbling machinery, serviced by tens of thousands of diesel trucks, this nightmare technology for energy release has turned rural areas in 34 U.S. states into toxic industrial zones.

Tonight's Associated Press report:

No Energy Industry Backing for the Word 'Fracking'

NEW YORK (AP) -- A different kind of F-word is stirring a linguistic and political debate as controversial as what it defines. 

"It was created by the industry, and the industry is going to have to live with it" -- Kate Sinding, Natural Resources Defense CouncilThe word is "fracking" - as in hydraulic fracturing, a technique long used by the oil and gas industry to free oil and gas from rock. 

It's not in the dictionary, the industry hates it, and President Barack Obama didn't use it in his State of the Union speech - even as he praised federal subsidies for it. 

The word sounds nasty, and environmental advocates have been able to use it to generate opposition - and revulsion - to what they say is a nasty process that threatens water supplies.
"It obviously calls to mind other less socially polite terms, and folks have been able to take advantage of that," said Kate Sinding, a senior attorney at the Natural Resources Defense Council who works on drilling issues. 

One of the chants at an anti-drilling rally in Albany earlier this month was "No Fracking Way!"
Industry executives argue that the word is deliberately misspelled by environmental activists and that it has become a slur that should not be used by media outlets that strive for objectivity.
"It's a co-opted word and a co-opted spelling used to make it look as offensive as people can try to make it look," said Michael Kehs, vice president for Strategic Affairs at Chesapeake Energy, the nation's second-largest natural gas producer. [...] 

The word does not appear in The Associated Press Stylebook, a guide for news organizations. David Minthorn, deputy standards editor at the AP, says there are tentative plans to include an entry in the 2012 edition. 

He said the current standard is to avoid using the word except in direct quotes, and to instead use "hydraulic fracturing." 

That won't stop activists - sometimes called "fracktivists" - from repeating the word as often as possible. 

"It was created by the industry, and the industry is going to have to live with it," says the NRDC's Sinding. 

Dave McCurdy, CEO of the American Gas Association, agrees, much to his dismay: "It's Madison Avenue hell," he says.

Stress Testing Geithner and Busting Up Bank of America

Thursday, January 26, 2012 by PRWatch.org
by Mary Bottari

Thanks to Occupy Wall Street, in the State of the Union this week President Obama struck some of his most populist themes yet. He wants to tax millionaires, bring back manufacturing and prosecute the big banks. He touted his Wall Street reforms saying the big banks are “no longer allowed to make risky bets with customers deposits” and “the rest of us aren’t bailing you out ever again.”

But are we safe from the next big bank bailout? Many experts are dubious and Wednesday the consumer advocacy group Public Citizen decided to test the theory in the most direct way possible. They used the administrative law process to formally petition the nation’s top bank regulators to move swiftly to break up Bank of America (BofA) asserting in their petition: “The bank poses a grave threat  to U.S. financial stability by any reasonable definition of that phrase.”


“A Ticking Time Bomb”

BofA is not just big, its behemoth. With assets of $2.1 trillion, equal to more than 14 percent of U.S. GDP, it is bigger than many small countries. Yet, its stock is trading at $7.

What does Wall Street know that we don’t?

The petition provides a compelling list of disturbing data points. In 2008-2009, BofA publicly took $45 billion in TARP bailout funds and secretly took another $1 trillion in emergency Federal Reserve loans. Yet, several analysts predict that BofA is woefully short of capital reserves and facing potentially billions in legal liability for its role in the crisis.

Although the bank declared net profits in recent quarters, these profit comes from accounting tricks, one-time asset sales and stock swaps. BofA’s share price to tangible book value is extremely low. The market suspects the bank is worth roughly half of what management claims and the price of credit default swaps (a type of insurance) on BofA recently rose to record highs.

“The bank is a ticking time bomb,” says David Arkush of Public Citizen. “If Bank of America in its current form were to fail, it would devastate the financial system. We’re asking the regulators to make sure that never happens. The only way to be sure is to reform the institution into something safer before any crisis materializes.”

Public Citizen asked the new Financial Stability Oversight Council (FSOC), which is chaired by Treasury Secretary Tim Geithner and made up of the nation's top bank regulators, to use the tools provided in the Dodd-Frank Wall Street reform law to act before a crisis occurs and to break BofA into smaller separate institutions. The law allows the FSOC to limit big bank mergers and acquisitions, restrict products and services or order it to divest assets or off-balance-sheet items after a vote to designate the institution a “grave threat” to financial stability.

“Too Big to Fail” is Alive and Well

Although President Obama said the goal of Dodd-Frank was to end the era of “too big to fail,” neither Geithner nor Fed Chair Ben Bernanke got the memo.

Geithner told the Special Inspector General for the Troubled Asset Relief Program in 2011 that future bailouts are possible:  “In the future we may have to do exceptional things again if we face a shock that large. You just don’t know what’s systemic and what’s not until you know the nature of the shock. It depends on the state of the world – how deep the recession is. We have better tools now, thanks to Dodd-Frank. But you have to know the nature of the shock.”

Bernanke may already be engaged in a back-door bailout of BofA. Recent news reportsindicate that BofA  is trying to move $22 trillion in derivatives out of its Merrill Lynch subsidiary into its FDIC-insured bank. The Fed favors the move. The Federal Depository Insurance Corporation (FDIC), which provides insurance to depositors if a bank fails, does not.

“By taking this action the Fed is allowing these derivatives to pose a direct risk to the FDIC insurance fund, keeping taxpayers on the hook for another bailout,” according to Arthur Wilmarth of George Washington Law School.

Groups like Public Citizen fought hard during the Dodd-Frank debates to insert into the bill tools to allow regulators to break up big banks and prevent the next crisis. With BofA in such fragile condition, its time for a “test of the machinery,” said scholar Lawrence Baxter of Duke Law School.

Expand the Stress Tests

Geithner is right when he says regulators can’t predict future shocks; will it be the EU debt crisis, a multi-million dollar damage award against the bank or exposure to something out of the blue? While we may not know its origin, we know the shock is coming.

Remember in the Dodd-Frank debates, an amendment to break up the banks was rejected, efforts to restore Glass-Steagall were rejected, a proposal to force banks to spin off and separately capitalize their dangerous derivatives desks was quashed. In leading the fight against the stronger measures, Geithner instead pushed the FSOC to scan the horizon for risk and keep an eye on the behemoth banks. He also pushed “stress tests,” which all too many banks seem to pass with flying colors.

Now its time to stress test Geithner. If the FSOC fails to deliberate and vote on the very serious condition of BofA, the whole exercise will be proven a sham.

ACTA: The Seldom Heard of International Treaty That Could Affect Internet Freedom

Wednesday, January 25, 2012 by Common Dreams
US among countries that have already signed ACTA


While there was  to online anti-piracy bills -- SOPA in the House and the PIPA in the Senate -- ACTA, the Anti-Counterfeiting Trade Agreement, has received scant media attention yet poses a tremendous threat to online freedom.

RT reports on how the ACTA treaty will work:

Under this new treaty, Internet Service Providers will police all data passing through them, making them legally responsible for what their users do online. And should you do something considered "breach of copyright" like, for instance, getting a tattoo of a brand logo, taking a photo and posting it somewhere, you may be disconnected from the Internet, fined or even jailed.

This, of course, threatens the entire founding idea of the Internet – the free sharing of information. But ACTA doesn't stop there. It goes beyond the Internet, bearing down on generic drugs and food patents. If passed, ACTA will enforce a global standard for seed patenting, which would wipe out independent, local farmers and make the world completely dependent on the patent owners (read "big corporations") for supplies.

TheRevolutionIsNow offers this video analysis of the treaty:

While protests were able to pressure officials from moving forward with the SOPA and PIPA bills, President Obama already signed ACTA months ago. The International Business Times reports:

ACTA, on the other hand, was already signed by the United States on Oct. 11, 2011, and Obama was not required to attain the approval of any outside authority to do so: not the Congress, not the Supreme Court, and not the American public.

Now that it has been signed, the legislative and judicial branches of the U.S. government also have little ability to challenge or amend the treaty, and Americans will be subject to a whole new scheme of laws, restrictions and regulations that could have them facing fines or jail through a process that would likely exist entirely outside the scope of the American justice system.

And Wired.co.uk reports:

It has been negotiated, mostly in secret, between various countries and the EU over the last four years. Many states have already signed up for Acta, well before the widespread web furore over Sopa. So far, Canada, Japan, Korea, Morocco, New Zealand, Singapore and the US have all signed up to Acta. The European Union, Mexico and Switzerland have supported the treaty and shown a commitment to signing it in the future. Acta was slipped through the European Council in an agriculture and fisheries meeting in December. Some of its more aggressive language has been removed from more recent iterations of the treaty, particularly concerning "disconnection of internet access". It is expected to be signed by the EU on Thursday, before the European Parliament has a chance to vote on it.

Echoing protests last week when many sites "went black" in protest of SOPA and PIPA,Agence France-Presse reports that close to 100 websites in Poland went black Tuesday in protest of their country's plan to sign ACTA.

So who supports this far-reaching treaty? Wired.co.uk reports:

Acta is supported by major copyright holders including pharmaceutical companies, movies studios and record labels. Lobbying organisations include GlaxoSmithKline, Pfizer, Sanofi-Aventis, Monsanto Company, Time Warner, Sony, Verizon, The Walt Disney Company, the Motion Picture Association of America, News Corporation, and Viacom. It looks like the European Commission supports it but the European Parliament are unanimously against it.