AUTHOR: JAVIER ORTEGA
Contents
Page
1. Summary 1
2. Accumulation by Financial Exaction in Current Capitalism 1
2.1 Appropriation of Economic Surplus in Capitalism 2
2.1.1 Accumulation by Financial Exaction is inherently Non-Productive and More Related to Primitive Accumulation 3
2.2 Power 7
2.2.1 The Conflict according to Specialists 9
2.2.2 Hegemony and Discipline 10
2.2.2.1 Accumulation by Financial Exaction Accepted as Natural 12
3. The Current Crisis and Financial Exaction 13
3.1 The US Bails Out the Financial System: A Large Scale Case of Accumulation by Financial Exaction 15
3.1.1 The Bretton Woods Order 18
3.1.1.1 The US Federal Reserve. Printing Dollar Notes! 22
4. Conclusions 23
5. References 25
1. Summary
This paper is aimed at developing the theoretical concept of a form of capital accumulation different from primitive accumulation and accumulation by reproduction as defined by Marxism. We will refer to this new type of capital accumulation as accumulation by financial exaction, and we will seek to explain how it works with a focus on a factor which is often poorly addressed in economics—Power.
We will further argue that accumulation by financial exaction—like the other forms of accumulation—requires the exercise of Power to be consistently imposed upon and carried out against majorities. Then, we will attempt to illustrate this concept within the framework of the current crisis.
Finally, we will draw conclusions and offer our prospective view to determine the major endogenous conflict to be faced by this system in the short-term.
2. Accumulation by Financial Exaction in Current Capitalism
It is accepted that the form of accumulation by reproduction inherent to the capitalist system often goes through cyclical crises resulting from excessive or over-production of goods and services supplied to solvent consumers who can afford to purchase them. It is worth noting that we are not arguing that there is no need for goods, but that there are not enough subjects with sufficient payment capacity to soak up the growing output required to maintain the rate of profit as understood by the capitalist logic. David Harvey argues that during overproduction crises, bourgeoisies seek to avoid loss of profits by resorting to a form of accumulation not envisaged by the Marxist theory, which he refers to as “accumulation by dispossession” (Harvey, 2003).
Harvey mentions instances of accumulation by dispossession at an international level substantiated by regional crises (Southeast Asia, Latin America, Russia, Turkey, etc.) whereby, after undergoing depreciation processes urged by central States and multilateral credit institutions, financial agents could dispossess ill-fated countries of valuable assets by cents.
Based on Harvey’s valuable contribution consisting in a attempt to describe a kind of accumulation different from primitive accumulation and accumulation by reproduction, we will address the issue related to the appropriation of the surplus produced by a third party without the imposition of violence or direct subordination of the dispossessed to the dispossessor in the production process where such surplus is generated .
We will further argue that the alienation of the surplus produced by “third parties” results from relations of Power, the exercise of which is not linearly perceived most of the times.
2.1 Appropriation of Economic Surplus in Capitalism
In the case of accumulation by reproduction, the economic surplus is alienated by capitalist subjects who hold power by virtue of their ownership or management of land and capital. Based on the advantage granted by the control of these means of production, capitalists assign workers to the performance of different tasks on the land (natural capital) or on the physical or intangible capital (services) in exchange for a salary. These jobs will generate goods which, in turn, will satisfy human needs.
Therefore, capitalists will take over the surplus through an appropriation system. Workers contribute their physical and intellectual efforts to create or add value to raw materials, or else perform an activity (service). These raw materials (turned into Assets by workers) or services enter the market in the form of goods—goods required to satisfy certain needs, and for which somebody will pay. Workers will receive only a part of the money paid for those goods (by way of salaries or wages); whereas the remaining amount will be kept by the capitalist under whose direction they were working. Capitalists will use this money to satisfy their own needs and plow the remainder back in to restart a new production cycle. For instance, they will buy new raw materials to manufacture new goods and sell them back in the market. This is how capital is reproduced and accumulated by capitalists by means of cycle repetition.
This type of accumulation is more evolved than that referred to as primitive accumulation by Marxism, which consists in the mere and downright violent dispossession of the means of production, such as arable land—for instance when the feudal power in England dispossessed the peasants of their lands—or material resources—like the looting of metallic wealth by Spanish conquerors in America. Violent dispossession may also be inflicted on human integrity, as is the case of slavery. The value resulting from such forceful appropriation will be the starting point for another and more complex type of accumulation—accumulation by reproduction.
2.1.1 Accumulation by Financial Exaction is inherently Non-Productive and More Related to Primitive Accumulation
We believe that, in addition to the already described accumulation models, there is a third one whose concept has been initially introduced by Harvey, but still requires further characterization and accurate identification since it is not exceptional and it is always present and intruding upon all surplus generation, exchange and allocation relations in current capitalism. This third form of accumulation is substantiated in a series of instruments, but it becomes more apparent in the operation of the speculative financial sector where resources are allocated regardless of their production in the real economy, which is where they are actually generated. Let us examine what finance represents.
Finance is the sector of the economic activity that deals with the issue, collection and management of money and other values such as securities, bonds, etc.; i.e. finance is concerned with money handling. Banks, in turn, are institutions that basically deal with financial brokerage. To put it differently, banks decide on the time, manner and destination of the flows of money. This is done by means of trade, since banks are nothing but trading actors which buy, sell and distribute one specific commodity: money.
Money is nothing but a commodity that differs from others in its versatility since it appeared at a higher stage of social evolution and was merely and solely established based on its exchange, reserve and value reference properties without any regard to its potential for use. Money has an abstract and symbolic value. It is a symbolic good representing value and facilitating the exchange of real goods that meet human needs. It has no use value, which means that banks notes or steel coins do not have any utility . Money is the best way to distinguish worker as an individuals from their work product. Money serves to buy goods, i.e. to buy the value added by work, by the workers themselves. Money is the suitable element to remove the subjective bias of the creative and transformative activity performed by workers; which is, in turn, the only way to meet human needs. Human needs are fulfilled by human work. Since money is given so much importance, the same importance will attach to those who have a decision on money ownership and flows because they will eventually control the energy of the labor paid by such money. Money issue, arbitration and management are political in nature, a matter of Power.
The financial system that handles money should be a rationalizing instrument to revitalize the production and exchange of goods and services. In the words of Joseph Stiglitz, it is up to the “brain” of the economy to decide to which production activity this scarce resource called capital should be allocated (Stiglitz, 2002); to decide where money should be channeled to.
However, finance (an abstract symbolism as it is) is currently detached from the real economy that it should address and represent. Financial capital flows occur in an immaterial market where spatial dimensions are negligible, the future is highly uncertain and available information is incomplete and likely to be distorted to the advantage of certain stakeholders who benefit from such distortions.
The point is that financial capital flows have diverted from the logics of real economy, which is the real, non-symbolic production body that should be represented by such financial capital. This is no coincidence, though. Symbolic finance secession from real productivity is the intended outcome pursued and orchestrated by concentrated Power as a mechanism to capture and appropriate the surplus produced by third parties. Not only is this practice observed at a company, factory or corporate level, but also at a global level. And most of the population has been passively subjected to the process. It is a matter of Power.
This is the reason why some privileged minorities may make profits from financial transactions, even when losses are recorded by the general production. This phenomenon may be explained in terms of a type of capitalist accumulation that is gaining momentum under this model—accumulation by financial exaction.
The possibility that a few may earn profits in the virtual world of finance at the expense of many others has nothing to do with real productivity. Sometimes, financial mechanisms may generate gains even if they do not follow the production logic—this is to say, even if they do not allocate capital (money) to profitable activities with a potential to satisfy needs; all of which has a magical appearance. Where do these earnings come from and how has the surplus been generated if production has not increased? Where does the measurable benefit come from if no activity that satisfies human needs has been performed?
There are many financial operations to make profits via simple, symbolic transactions that fulfill nobody's material needs. For instance, gains may be generated by means of speculative fluctuations in the exchange of abstract instruments, as it is the case of currency trading or the trade of bonds of sovereign debts or debts by private companies; or loans at usurious and variable interest rates; or stock transactions of shares representing an ideal ownership stake in a company without considering the real economic performance of the relevant company; or operations in futures or derivatives markets with deliberately biased expectations. In other cases, the indicators of the financial economy serving as value benchmarks overvalue certain properties or assets of the real economy to become eventually purchased at exaggeratedly high prices.
When these symbolic and virtual fluctuations allow an actor to appropriate a real surplus, the process resembles a zero-sum equation. This means that the money earned by some operators through financial (symbolic) brokerage is taken from those who produced it in the real economy but were dispossessed of such gains. Therefore, financial brokerage has not created anything new, but merely transferred something that already existed from one hand into another. The complexity of the financial system enables this process, which sometimes entails dispossession, to be carried out without explicit violence. This is what we call mechanisms of accumulation by financial exaction.
The system of accumulation by financial exaction, resulting from the boom of global finance, has led surplus-producing majorities to suffer from systematic dispossession of said surplus through the institutionalization of complex financial mechanisms operated by those minorities in whose hands lie information and political Power (which is completely unrelated to formal, institutional political power), i.e. minorities who can impose their power over the affected majorities. Financial brokerage requires Power to make surplus appropriation possible. We are not referring to market accidents or failures (Goransky, 2004), but to a Power scheme run by the very beneficiaries who take possession of the profits generated by others.
The financial structure enables the beneficiary minorities to appropriate the profits that have not been produced by them. However, this is not done automatically. Minorities need to exercise their Power over the damaged majorities in different ways. Power may be materialized (and institutionalized) by disclosing false data and information with no correlate in the real economy to create false expectations (for instance, by encouraging massive currency trading that would lead to devaluation and, thus, reduce the salaries and the debts in national currency owed by said minorities); by hegemonizing through the imposition of cultural standards with the consensus of the dispossessed majorities that will meekly obey conducts detrimental to their own interests (for example, by promoting indebtedness at usurious rates to finance superfluous expenses); or directly by State co-optation with the establishment of mandatory regulations providing for surplus appropriation by minorities (for instance, through the nationalization of private debts).
The minorities that manipulate the virtual and abstract financial system take over the surplus generated by the majorities in the real and material economy. These transfers inuring to the benefit of the minorities always occur at the level of the symbolic, virtual or financial economy. The beneficiaries of these permanent transfers use exaction accumulation mechanisms which differ from the primitive accumulation or accumulation by reproduction systems.
This is how those who pull the strings of finance capture the surplus generated by the work of others who are, in turn, forced to make transactions through a financial system that has been imposed upon them and over which they have no control.
We can offer some examples of this operation. When the State nationalizes debts owed by private companies, it is transferring to the treasury (i.e., the population at large) the obligations taken by private actors who reaped the benefits of indebtedness and were then released from their debts now assumed by the State. A typical example is the build-up of foreign debt by Latin American countries due to multiple nationalizations. The winners? Minority private actors. The losers? All taxpayers.
Another example is that of contributions to pension funds managed by private companies through mandatory deductions from salaries. Pension funds are aimed at saving and building up capital to ensure future retirement benefits for workers. However, upon reaching retirement age, they are informed that the money that had been regularly deducted from their salaries throughout their entire lives has been lost because it had been invested in unprofitable businesses. Hence, for years contributors have then been deprived of part of their salaries and they will never get these emoluments back. The solution would be, as usual, for the State to take up the debt and pay the relevant retirement benefits to the betrayed contributors. The winners? Pension fund managers. The losers? Contributors and taxpayers.
Another mechanism consists in currency depreciations driven by gossips or bank runs intended to increase one private subject’s purchase power of foreign currency, on the one hand, and to reduce the debts owed in the depreciated national currency, on the other. The winners? Currency holders. The losers? Employees who earn their salaries and wages in the national currency and lose purchase power due to depreciation.
There are many other examples: incremental, usurious interest rates payable by natural persons who incurred long-term debts; or mandatory bancarization to which employees are subject when their salaries are paid in bank accounts, with banks charging all kinds of commissions for this service. We will describe other forms of accumulation by financial exaction below.
A Definition:
Accumulation by financial exaction can be defined as the action taken by an (active, empowered) subject who manipulates the symbolic economy to dispossess another (passive, disempowered) subject of the surplus generated by the latter. The distinctive traits of accumulation by financial exaction vis-à-vis primitive accumulation and accumulation by reproduction are:
a. The active subject has not directed, been involved or managed the production process by means of which the passive subject generated the relevant surplus.
b. The active subject has not resorted to any violent or illegal means to achieve dispossession.
2.2 Power
As put forward by Jacob Goransky (Goransky, 2004), we believe that when addressing economic issues it is an overt scientific absurdity to avoid referring to or attempting to refer to the nature of Power, and those who hold it and regulate productivity and the market by imposing a certain relationship structure. We also consider that such absurdity is even more inexcusable when addressing symbolic rationalization processes that establish (and impose) a lasting and consistent system for surplus appropriation and redistribution; as is the case with speculative finance.
The word Power comes from the Latin word “potere” which means being able to. The root of the word (poti) means powerful, somebody who is empowered, able to do something. Therefore, an empowered actor is somebody who holds Power; and having Power entails having the ability to do something. To do what? Whatever that actor is willing to do. And what will this actor be willing to do? Most probably, whatever contributes to his own well-being.
When it comes to economy (where the ubiquitous constant feature is the scarcity of resources), the empowered actor—i.e. the one who is able to act—will probably want a resource that is also wanted, desired and coveted by someone else. So, there is another actor who wants the same resource that is desired by the one who holds Power. We are faced with a conflict of interests. The dilemma will be either to determine some cooperative way to settle the conflict of interests between the empowered and the disempowered subjects, or to directly engage in a struggle for such resource, in which case the party with a greater capacity for action will prevail over the other one and appropriate the relevant resource. The will of the powerful will defeat that of the powerless, and the winners will be even more empowered to carry out their will.
Max Weber argues that “power is the probability that one actor in a social relationship will be in a position to carry out his will”. As already argued, this will may conflict with other wills—a common circumstance given the scarcity of resources is inherent to economics.
It is precisely because the empowered actor holds Power and has greater capacity for action that he can impose his will and designs over the disempowered actor. And Power may be exercised by using physical violence, by adopting regulations and systems providing for observance of a specific behavior or by threatening with sanctions in case of non-compliance with the imposed rules.
The above-described situation is, however, somehow extreme. We assume that there is someone who is willing to confront the will of the powerful actor, even in the absence of the necessary means or capacity. But from that position of inferiority, the “disempowered” actor is struggling against, disturbing, troubling and upsetting the empowered actor, and is trying to put up resistance. However, the disempowered actor should better not even try to resist. The most suitable scenario for the powerful actor is one without any opposition. Hence, the ideal course of action for that who holds Power is to sap the will of those who, because affected, should become his contenders.
2.2.1 The Conflict according to Specialists
According to Carl Von Clausewitz, war is an act of force to compel our enemy to do our will. If we desire to defeat the enemy, we have to annihilate his powers of resistance. This is expressed by the sum of available means and the strength of the will. With regards to the strength of volition, Clausewitz points out that it is difficult to determine and can only be estimated to a certain extent by the strength of the motives (Von Clausewitz, 1999).
Thus, war is the shock of two opposing forces that begin hostilities with the sole purpose of imposing to each other. The will that gathers more material means at the precise moment of the collision shall prevail … and shall be better motivated to win—the most willing will. It can be inferred that the goal is to break the adversary’s will, and if it can be annulled by voiding it of content, much better.
We shall add to this point three maxims from “The Art of War” by Sun Tzu, book in fashion among the top financial business elite:
• “All warfare is based on deception.”
• “Supreme excellence consists in breaking the enemy's resistance without fighting.”
• “With his forces intact he [the skillful leader] will dispute the mastery of the Empire, and thus, without losing a man, his triumph will be complete.” (Sun Tzu, 2006).
What is our point? That we find in much of the structure of the symbolic economy of finance a sophisticated massive and deceitful means to extract the surplus from the big mass producing it in favor of a small group that will end up enjoying it. This accounts for a domination order (one among many) imposed by those with Power over weaker subjects, thus serving from the fruits of the work of the later. This order is more complex, diffuse, comprehensive, and abstract than other orders such as the direct exploitation of the worker by means of low wages, the evident restriction of access to certain rights, or the direct violent dispossession. The success of the scheme of the alienation by means of the finances is that the exaction is massive, on a large scale, but it takes place without apparent violence and it is accepted as “natural” by the systematically dispossessed majorities that do not conform or manifest their will to resist.
2.2.2 Hegemony and Discipline
The term “hegemony” has its origin in the Greek word hegeisthai (to lead). In our approach, hegemony shall be the supremacy conquered by an entity (or group of entities) over its fellow men. The notion of hegemony can be applied to a nation or group of nations that directly or indirectly impose their policies in the international concert of nations, or to a group of people or class that prevails over the rest within a given society.
Antonio Gramsci profusely worked on the cultural, ideological, institutional and value-building aspects that shall be established and reproduced by a given hegemony. Like other Marxist authors, Gramsci claimed that there are two stages in the organization of a society. There is an infrastructure composed of the forces and relations of production that are established among them, where the economic aspects prevail. In order to consolidate and reproduce the infrastructure, a superstructure is generated composed of institutions, culture, ideas, prejudices, traditions, beliefs, and common sense, among others. This construction that is a consequence of the infrastructure is also the cause of its preservation. For example, in an infrastructure where the production relationships are constituted by capitalists that own the private property and exploit salaried proletarians, there will be a superstructure where the institutions and laws shall protect the private property, the belief that the existence of individual and not collective property is natural, the prejudice to call lazy those that are not owners, and the common sense that indicates that any attempt to change such order shall be doomed to failure.
When a winning group hegemonizes the society in which it has imposed upon, by controlling the educational system, the institutions, the imagination, and the mass communication media, it shall “naturalize” its domination, in other words, it shall indoctrinate the population in the idea that this is the best possible world, that nothing can divert from the system, and that, if tried, it shall be detrimental to everyone. The domination system appears as a “natural” factor which is impossible to change. Therefore, the initial hegemonic block shall incorporate as many actors as possible into a thinking and behavior pattern functional to the dominator (even when detrimental to the dominated party) and with a claim of totalization over the society as a whole. The lamb is convinced of the legitimacy of the wolf’s right to eat lamb meat. Thus, the hegemonic bloc manages to docilely get the whole society behind a project without using coercion or repression by the State; a State that it is also co-opted on.
As to the formation and instilment of beliefs, ideas, preconceptions and indoctrination in general, Antonio Gramsci was not able to witness the process driven by the IT and communications revolution. He did not get to know the Internet, the mass multimedia, the powerful industry of the television and the movies, the boom of telecommunications as a global network, or the engineering of intangible assets, and needless to mention globalization. We wonder what he would have thought about the potential of planetary hegemonization if had he lived to see all of this.
Michel Foucault conceives Power as the actions that interfere with other actions. Such interference does not need to be violent. Power always seeks for docile and libertarian appearances, avoids to make the conflict obvious, avoids direct coercion, tries to totalize from the top and aims at having all wills willingly mold to its own ways.
Power devices are not confined in the institutions in a static manner, but rather they spread to all social relationships. Power devices are dynamic, constantly flowing and diffusively invading all aspects. They are present (and act) both in the dominating as well as in the dominated individuals.
As heir to Nietzsche’s conceptions, Foucault also understands that the “truth” (that is, what societies deem as truth) is in fact a conquest of Power. It is not in the nature of things to be “known” by men. The act of desiring to know a thing is an act of will of the Power over that thing. It is a subject that, by means of knowledge, wants to appropriate the thing for himself.
When Power triumphs, when Power knows, gives origin to beliefs that will become true to everyone, organizing social life up to the most intimate aspects and giving rise to docile, inertial, imitative and reflex conducts, unthought-of by everyone. What is “natural”, the ordinary occurrence, is not thought of; others have thought for us. Here, we also see the traits of philosopher Martin Heidegger and his “status of interpreted”. We are not the interpreters of this world, we are being interpreted. We are thrown into a world that precedes us and that has already been interpreted by somebody else: a world that was thought of and conformed by somebody else. Who is that somebody else that thought for us? Who else but Power? That is why to have our very own thoughts is subversive; it “denaturalizes” the “natural” order of things set up by Power.
Foucault deemed Power—in its classical-contractual conception of sovereignty, i.e., turned into a thing and catalyzed in an institution (the sovereign State)—as a necessary tool although insufficient if the aim was to dominate the modern and complex society of the end of the XVIII century. Sovereign Power would miss the multiple entangled, diffuse and abstract aspects of a human life that also needs to control. Thus, the concept of disciplinary Power is born, a Power that controls and trains the subjects from the institutions (the school, the army, the hospital, the church, the prison, the family), the beliefs (ethics, religion) and the discourse of knowledge (the sciences).
To this notion conjugates the Pastoral Power inherited by the State from the Christian pastors. Thus, the State exercises this form of Power by relating directly with the groups and people individually to guide them to the achievement, not of paradise, but of a promised well-being that is in line with the prevailing production system. Rather than Christian pastors, it is the State that will lead the way through its institutions and officers, be them doctors, teachers, policemen, judges and even the family.
Finally, there is the Bio-Power, which is the continuation of the right to dispose of the life and death of the people, held by the old Sovereign. Bio-Power seeks to convert life itself into an object to be managed by power. Life can be promoted (by implementing universal health-care systems, stimulating birth, supporting immigration and human rights) or otherwise, discouraged (through commercial health-care systems, genocide, birth-control policies, a repressive police force, death penalty).
We can see here how Power, as conceived by Gramsci and Foucault, permeates up to the core of all aspects of social life and of the individuals that are part of it. Sovereign Power—which is repressive, institutional, static and coercive—comes second in rank in the face of the hegemonic and disciplinary complex imposed to control and subordinate societies to a given system of production and distribution of surplus.
2.2.2.1 Accumulation by Financial Exaction Accepted as Natural
There are symbolic instruments used as tools by the empowered minorities to dispossess the majorities of the surplus they generated through financial exaction. These instruments are imposed by pacific “naturalization” rather than by violent and formal force. The dispossessed majorities see these instruments that organize and condition their lives as something “natural” when, in fact, they are being imposed on them.
These instruments are articulated by means of a hegemonic financial “discourse”, that is to say, a form (not the only one) to convey things or facts (deliberately chosen) with a claim of truth and self-legitimating capacity. Traditions, habits, beliefs and religions have their own discourse. Sciences are also a group with its own discourse; social sciences (economy, politics, sociology) being a subgroup. And all of them have a claim of truth. The financial discourse is imposed/accepted as the only possible truth to regulate and dynamize certain aspects of the economic life. This discourse has an articulate and channeling effect over all the other economic relationships, and its self-legitimating supremacy pours down to all remaining aspects of the social life.
By imposition of the discourse, the dispossessed majorities are disciplined into the acceptance of the system with no objections as if it were not the only possible one, but at least the best of the possible worlds. Discipline is an array of knowledge (conformed by the discourse) with control capacity. When studying at University (for example, economy) we are assimilating a certain economic discourse, that most certainly will be the one prevailing in our time. We will be academically “trained” in this discourse through an authority system poured upon us by the teacher, the official bibliography, the syllabus, the attendance and examination systems. Once completed the process, we will have graduated as professionals. We will have already been disciplined to maintain and reproduce a given discourse and to control that no one diverts from it. The more people are trained, the more docile and functional to Power we will become.
3. The Current Crisis and Financial Exaction
A brief summary of the current crisis might lead as to 2001, when the Internet bubble bursted. Agents vested with the Power to handle information, build preconceptions and manipulate expectations made us believe the Internet sites were sources of wealth. And all capital investments were directed there. Imagine a whole system of risk assessment companies, consulting firms, renown operators, specialists and academicians, scientific publications, and mass media companies pointing to Internet sites as the segment to invest since it was profitable and safe. Therefore, a fictitious investment path is made up to channel the excess of liquidity that cannot be invested in the production of goods that are not in demand. There is no trustworthy aggregate demand to absorb those goods. But it is necessary to maintain the rate of returns, and thus new recipients of investments are created through a financial fantasy that allows for the growth of profits. This had to burst at some point, and when that happened, when the deceitful dot-com companies in the Internet bubble collapsed, the capital fled to other speculative alternatives.
In two years, the US Federal Reserve lowered the price of money, i.e. the interest rates, from 6.5% to 1%. Therefore, all the money deposited in banks or bank-related entities lost profitability. It is for that reason that a new option had to be generated to channel liquidity in a profitable manner, and so the home real estate market was created.
The homeowners’ real estate in the US was artificially rated with no correlate in the real economy. The banks, seeking for profits, became heavily involved in mortgage plans to acquire these properties. They massively began to grant mortgage loans to purchase overvalued properties. The point is that they did not spare much to analyze the creditworthiness and repayment capacity of the borrower. If he was financially sound, the mortgage was rated prime and granted. If, however, the borrower was not that solvent, the mortgage was rated subprime and was granted anyway. The market believed that in the years to come the price of real state was going to increase even more. Then, if the subprime mortgage holder failed to pay in the future, the property would be foreclosed, and given by that time it would have a much higher value, Banks would recover (and with profit) what had been lent.
With this scheme working properly, American banks needed additional funds to continue granting loans. As this generous extension of credit—which in turn involved borrowing funds to be able to grant yet more credit—could contravene the international rules on the self-regulation of the financial system resulting from the Basel Accord (requiring a certain balance between the bank’s assets and liabilities), the US banks came up with an array of mechanisms to mock such regulations.
In the first place, banks created satellite and legally different entities, although subordinated in facts. These organizations were not corporations or banks but trusts or funds with little institutional-regulatory development: the so called “conduits”.
Second, they securitized the mortgage loans they had granted, in other words, they created “packages” with a certain number of mortgage loans and backed them with securities that were going to be traded at a latter stage. How did this work? The security promised to pay in the future an amount of money higher than the price at which it was purchased at present. For example, if you bought the security at $10 today, you would receive $15 in the future. And how would you know that such security was going to be worth $15 in the future? Because a package of mortgage loans is tied-up to such security, and it would suffice that mortgage holders paid the installments agreed upon to finance the security and thus meet the promise to pay those $15 in the future. These are the Mortgage Backed Securities, or MBS. It is an abstract and dangerous chain of indebtedness, where if one link fails, the chain will get broken and trigger a generalized problem.
So the banks securitized the mortgages and traded them in the market. Who bought those securities from the banks? Their own subordinate “conduits” in the first place, and then they traded those securities worldwide. But, how did anyone dare to buy such dubious securities? This is where the financial symbolism operated by the individuals with Power kicked in: the rating agencies. These agencies are to determine whether a financial asset (security) is good or bad, as imposed by the Basel Accord. But how to mock these rules? With symbolic alchemy. Mortgage packages combined prime, regular and subprime mortgages. Thus, the allegedly risk of the security backed with mortgages was diversified, the agency rated it AAA (the best rate available), and the security became very reliable.
The United States soaked the world with these securities, but eventually the real economy knocked on the door: those that were supposed to pay their mortgages (the basis of the system) failed to do so because they were insolvent. When properties were to be foreclosed, not only had the prices not increased (bear in mind that the properties were “overvalued”) but they had declined. And when the properties were auctioned off, the proceeds did not even cover the amount lent. The basis of the scheme collapsed, mortgage backed securities turned unpayable and the crisis bursted.
MBS were held by the most important banks and financial entities worldwide. The volume securities gone bad is still uncertain today, but the outlook is not good. Banks holding these securities in their financial statements do not trust one another. The US government and the main European economies are designing bailout plans to alleviate the crisis. All these programs are financed by public revenue, that is to say, by taxpayers’ money. Let us address case of the United States in particular.
3.1 The US Bails Out the Financial System: A Large Scale Case of Accumulation by Financial Exaction
The US government aided the private financial sector that triggered this last crisis with colossal resources and multiple actions.
The federal government bought stocks of companies on the verge of bankruptcy in order to save them. The best example is the case of the mortgage entities Fannie Mae and Freddie Mac. These corporations had a public origin: Fannie was incorporated in 1938 by Roosevelt amidst Keynes’ New Deal. Freddie was incorporated later, in 1970. The State created them to stimulate homeownership through mortgage loans when banks were reluctant to grant credits. They operated as last resource lenders in the mortgage system. However, as it is a trend in capitalism, the State backs off when the business does well and transfers the hard task to appropriate the profits to the private sector. Fannie and Freddie were “privatized.” Nowadays, they are the two largest mortgage entities in the United States. Together, they back up almost fifty per cent of the mortgage and special loans in the country worth about $6 billion.
But when things begin to go wrong, it is time for the State to step in and “naturally” absorb the losses, as it always occurs in capitalism. As it was the case with Fannie and Freddie in this crisis. The US government made the largest intervention in the history of the American banking sector by allocating $200 billion to save it from bankruptcy.
The case extended to other private organizations. The US government also rescued the financial system with multimillion loans, while regulatory bodies created several aid mechanisms to prevent the bankruptcy of the alchemist minorities operating in the financial markets. Economist Nouriel Roubini ironically referred to these governmental interventions to bail out private capitals as the transformation of the USA into the USSRA—the United Socialist State Republic of America. The American bailout measures represent the biggest and most socialist government intervention since the formation of the Soviet Union and Communist China. Of course, it is a unique form of socialism that benefits the rich in Wall Street and is financed by the taxes paid by the poor —the transfer of the surplus produced by the disempowered majorities to the empowered minorities via mechanisms of financial exaction.
But there are still more public bailout actions from private bankruptcy.
In the context of this crisis, mortgage-backed debts are called “toxic assets,” and, understandably, nobody wants these securities. It is in this moment that the Government comes into scene once again with the “Public-Private Investment Program” (PPIP) to purchase toxic asses. Why public-private? Because both the public and private sectors are involved in this program, although not in equal parts as it is typical in capitalism. Hence, public-private investment funds are created to fund purchases of dubious assets. In the purchase of a toxic asset the private investor would put 15% of the asset value, with the government contributing the remainder 85% though a loan. Repayment of the government loan is only backed by the purchased toxic assets, and the whole operation is managed by private asset managers.
This program is based on the notion that toxic assets are undervalued because they are considered to be bad assets, although they are not actually that bad. All of the toxic assets are held by banks, and for this reason they do not trust one another. When toxic assets are confirmed to be not as bad as they were thought to be (driven by the public-private program), trust will be reinstated among banks and the absence of credit will be overcome.
Let us see how this program would work. If the toxic asset is purchased at $100, the private investor will contribute $15 and the government will provide $85 through a loan. The bank has, thus, gotten rid of the toxic asset. If, after some time and when the markets calm down, the asset value reaches $150, the private investor will recover its $15 and the government its $85; for the excess $50 the government will receive interests and the remaining amount will go down to the private asset managers as profits—a huge deal for these private operators.
But, what if (as everything seems to indicate) these toxic assets are as bad as they are believed to be? We should bear in mind that repayment is collateralized by the future sale of the toxic asset. Thus, if after the purchase the asset value remains at $100, both the private investor and the government will recover their investment. However, if the asset turns out to be worth $50 and that becomes the selling price; then the private investor will recover the $15 originally paid, while the government will lose $35. In other words, the risk for the private investor is 15% and 85% for the government. Nevertheless, and despite the lower risk, the operation will be managed by private financial agents. To make matters worse, it is the management by these financial agents that triggered the crisis. The solution is expected to be brought by the hands of those who originated the problem. In Paul Krugman’s words, this program appears to provide a subsidy to the private sector to minimize the risks involved in the purchase of bad assets—risks that are only taken by the government. This is the traditional scheme of privatizing the profits and socializing the losses.
President Obama’s bailout plan for the US is worth $800 billion, which added to President Bush’s $380 billion pending distribution amounts to $1,180 billion, or $1.1 trillion. Everything financed by the Government. By taxpayers. By the majorities.
What does this figure represent? How much is being spent to bail out those who committed such embezzlement?
According to an IMF estimate for 2008, $1.1 trillion represents 8% of the US GDP ($14,264,600 million). The same source reports Argentina’s GDP for 2008 amounts to $572.860 billion, that is to say, 48% (about half) the bailout amount. This rescue plan worth $1.1 trillion also equals one year of individual income tax by taxpayers to the US Federal Government, 45% of the US Treasury revenues.
Will this financial adventure of the empowered minorities dispossess American taxpayers through the levying of taxes to fund anti-crises programs? Will these mechanisms of accumulation by financial exaction only capture the surplus generated by the American workforce? We very much doubt that.
This bailout figure also matches the US budgetary deficit for 2009. The US has been accumulating fiscal deficit (total expenditure exceeding total revenues) as well as current account deficit (total imports greater than total exports) over the past three decades. These twin deficits are financed by the rest of the world. How is this so? Let us analyze the dollar and its recent history.
3.1.1 The Bretton Woods Order
In 1944, the envisaged end of World War II favoring the allies called for a new post-war economic order. This new system emerged from the Bretton Woods agreement, i.e., the resolutions of the United Nations Monetary and Financial Conference, held in the hotel resort in Bretton Woods, New Hampshire, in July that year.
The United States emerged as the dominating Power of those days. American ground had not been reached by the scourge of war, and the productive capacity was intact. Moreover, such capacity was enhanced by the collective effort fueled by war—a war that encouraged the technological industrial complex to produce in order to meet the unlimited demand generated by a conflagration.
At that time, strong currencies were gold convertible, and the United States accumulated 70% of the world’s gold reserves. Apart from being the strongest productive system, the US was a large creditor to the rest of the world’s powers that had become heavily indebted due to the war. Naturally, the US intended to impose its overwhelming superiority.
The United States wanted to foster the creation of an international market to place its production. The balance of payment imbalances among countries would become an obstacle for the world’s aggregate demand that was to absorb the American overproduction. There was also the question of which means or currency was to be used for international trade. Currency is Power. And the US wanted to impose the dollar.
The dispute at Bretton Woods focused on two positions: one represented by John Maynard Keynes on the British side, and the other by Harry Dexter White of the American government. Lord Keynes advocated for the creation of the International Clearing Union, an institution where every country would hold a bancors’ account. The bancor would become the monetary unit for international trade, the means of payment conceived for imports and exports. The account at the Clearing Union should tend towards zero to reflect the equilibrium of each country’s balance of payments. A country accumulating many bancors would be selling more than it was buying and promoting trade disequilibrium. To discourage this behavior, a payment was imposed on the excess of bancors accumulated in the account, thus stimulating surplus countries to increase their imports from deficit countries, and thereby creating equilibrium in the balance of payments. In turn, if deficit countries decided to continue importing despite their deficits, they had to fund themselves with bancors at a certain interest rate, a proceeding that would operate as a deterrent of imports.
It becomes evident that a country aiming to place its immense production in the international market, which was a creditor to other world’s powers and which accumulated 70% of the international gold reserves, would not seek for the balance proposed by Keynes. Such country was the United States, and its objective was not to favor equilibrium but to consolidate American hegemony.
Bretton Woods established the gold-dollar standard. All the countries in the world had to define their money in terms of American dollars; and the US, in turn, referenced the value of the dollar to gold. Hence, the Unites States imposed its currency as the means of exchange for foreign trade and reserve of value. The rest of the countries accepted the system since, in addition to the matter of Power, they preferred to hold their reserves in dollars in an American bank and yielding interests rather than immobilized in gold and producing no revenue.
The International Monetary Fund was established to mitigate the balance of payment disequilibriums of those countries purchasing the American production. The mission of the IMF, then, was to supply liquidity to countries with no sufficient money to maintain their level of purchases. The International Bank for Reconstruction and Development or the World Bank (IBRD/WB) was created to meet the financing infrastructure needs.
The Bretton Woods institutionalization of the US Power was nourished, confirmed and supported in facts by the economic order prevailing at the time. However, things started to change with the passing of time. Already by the 1960s, the US held 22% of the world’s gold down from the 70% that used to accumulate two decades before, which forced the US to introduce partial devaluations of the dollar against the ounce of gold. It also became clear those days the use America made of the power of the currency of international exchange and reserve (the dollar) to support its hegemony. It was during this period that economist and advisor to the French President Charles De Gaulle, Jacques Rueff, argued:
It is not possible for creditor countries not to become aware one day that by accumulating assets-dollars they are paying—at least until the repatriation of their reserves in the US becomes effective—for the real property purchased in their own territories by Americans. It is at their own expense that the US purchases factories, businesses, companies, or even funds some of its prestige or assistance expenditure.
European powers showed some reaction by an increasing trend to convert their dollar reserves into gold. It is in this context that the US makes an ultimate demonstration and exercise of Power. On August 5, 1971, President Richard Nixon boldly and unilaterally removed the dollar from the gold standard. This act meant almost the nationalization of the monetary reserves the other countries held in dollars. As a consequence, the US was able to issue dollars with no gold peg restrictions. Over the past three decades the USA has been running fiscal and commercial deficits, financed by the fiduciary (unbacked) issue of dollars. If this growing issue of symbolic means of exchange, the dollar, finds no correlate and equivalence in the increase of actual productivity and the commercial balance of the USA, what is, then, backing this issue of dollars? Power. What else?
The US has now bestowed the first place as the world’s economic power to the European Union. American wealth is no longer comparatively superior to that of the aggregate world’s riches as it used to be by the mid XX century, and only accounts for about 20% of the world’s assets. Yet, US military spending amounts to 48% of the global expenditure in this field. This confers America an overwhelming superiority in the use of organized violence, to which it can resort—as it, in fact, does—unilaterally. The US exports its culture, language and ideology to the rest of the world, even more in times of an information and communication revolution (the Internet, telecommunications, concentrated mass media). The centers that have originated this revolution are based in the USA. California hosts Apple, the Silicon Valley, Hollywood and Google. Washington State is home to Microsoft. CNN’s headquarters are in Georgia. Academic thought-maker centers also concentrate in the USA: Harvard University is based in Massachusetts, Yale in Connecticut, and Chicago University in state of the same name.
In this context, the law of communicating vessels advocated by Luis Dallanegra Pedraza appears to fit in. To retain their supremacy, hegemonic actors will try to compensate the lack of power in one segment by exercising power in another segment where they enjoy increased strength (Dallanegra Pedraza, 1998).
Hardt and Negri resort to the allegory of the three capitals of the Empire, where New York is the economic capital, Washington DC the military capital, and Los Angeles the information capital. Along these lines, the United States would make up for the loss of economic power in New York with Washington threatening to take war to any corner of the world, and Los Angeles propagating a disciplining argument to conform to the American cultural leadership with no objections. Our hypothesis is provocative and merits further analysis.
The imposition of the dollar to the world is an act of Power that allows a minority to alienate the surplus generated by the rest of the world through this symbolic financial instrument—the American currency. This act of Power is based not only on the remarkable economic superiority of the US, but also—and possibly more importantly—on its cultural and military supremacy.
Thus, the complex of instruments that extract the surplus of symbolic finance could be organized into pyramidal levels, with the issue of dollars at the top of the pyramid and the lower instruments subordinated to the higher ranks, and all of them appropriating the surplus in their respective level. At the summit, the dollar, the issue of which is not a sovereign prerogative of a State but a private act of the financial minority operating the appropriation engineering.
THE FINANCIAL EXTRACTING COMPLEX
Source: Developed by the author.
3.1.1.1 The US Federal Reserve. Printing Dollar Notes!
The Federal Reserve (the FED) is the central banking system of the United States. It is a private organization composed of twelve banks. Although independent from the Government, it is supervised by a council whose members are appointed by the President of the US and confirmed by the Senate. Even so, the decisions by the FED need no approval by the government and in practice it is a very independent entity.
The FED system is composed of a league of twelve privately-owned banks. For instance, the well-known JP Morgan, Chase Manhattan Bank, Samuel Goldman Sachs and Rockefeller Chemical Bank, among others, have equity participation in the Federal Reserve Bank of New York (one of the twelve entities that is part of the system).
The duties of the Federal Reserve are: conducting the nation's monetary policy, regulating banking institutions, maintaining stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions.
The Federal Reserve System challenges our conceptions of the classical public institutions. The so called Federal Reserve is not a reserve since it is not required to hold reserves by law. It is neither a federal entity because it is not a governmental organization. It is a league of private banks that pays no taxes, but manages the monetary policy of a country. The owners of the FED need not be Americans and, in fact, many of them are not. In other respects, it is a power of the Congress, according to the provisions of Article I, Section 8 of the US Constitution, to coin money. Nevertheless, it is the Federal Reserve that exercises the power with respect to the official American currency; it is the FED that prints the dollar notes.
Hence, the main instrument for the financial exaction of the surplus produced by the majorities, the dollar, is created and regulated by a private financial corporation—the FED. A financial minority manages the mechanism for the issue and flow of dollars. This is logical and cannot be considered a hidden or conspiring act. It follows naturally from the events we have been describing, even if we had no concrete or empirical data to confirm so.
4. Conclusions
In this text we have tried to conceptualize the form of accumulation by financial exaction. This type of accumulation dispossesses the majorities, from the outside, of the surplus they have produced and transfer it to the minorities in a silent and sustained manner. For that purpose, the system of accumulation by financial exaction needs Power to be imposed over the majorities through cultural hegemony and social discipline, along with the classical and coercive institutional mechanisms.
Focusing on the current crisis, we have reached the conclusion that this is a case of macro-accumulation by financial exaction where the minorities that manage the variables of the financial symbolic economy dispossess the majorities of the surplus they generate. These majorities are composed by:
• The American citizens that will fund the governmental bailout packages for the financial sector through their taxes and the loss of social assets.
• The popular sectors in the rest of the countries that will have to increase their transfer of surpluses to the United States, which will finance the cost of the crisis by issuing more dollars that will be placed in the markets around the world.
It can be anticipated that the struggle among the world concert of nations will be directed to establishing whether they will continue to finance the United States by accepting the dollar as the money of world reserve and exchange, or whether they will try to generate alternative monetary mechanisms. China has overtly put forward its position and seeks to celebrate bilateral agreements with the countries with which engages in foreign trade to avoid the use of the dollar and thus hinder the hegemony of the American currency. The European Union has objected to further huge public bailout plans by the US, since that will translate into an increased issue of dollars to soak the world’s markets. Such action will lead to the devaluation of the dollar, turn American production more competitive to the detriment of other economies, and reduce the value of reserves other countries keep in dollars.
Argentina holds its reserves in dollars in the United States. Nevertheless, interesting advances have been made with Brazil to use both countries’ sovereign currencies for bilateral trade.
The United States is not expected to easily renounce the hegemony of the dollar—important consequence and cause of the Power it exercises in the world. We infer the US will seek to support the Bretton Wood’s institutions that consolidate its supremacy, despite the factors that originated such order over fifty years ago have varied. Furthermore, the US will not be able to mutate to a widespread pacifism, even with the change in the presidential administration. It is in the military field, because of its absolute superiority, that the US will have to make up for the loss of ground in the other areas. And although American cultural dominance may be hindered, a cultural collapse does not take years but generations.
Hence, it is up to us, the peripheral subjects, to deconstruct and denaturalize through intellection and action these mechanisms of financial exaction. The continuous migration of the surplus generated in our nation to other latitudes (for instance, through the mechanism of exaction represented by payment of the illegitimate foreign debt, and which would have been cancelled many decades ago had it not been for the usurious interests imposed) affects every possibility to erect our country in an autonomous space of national accumulation with distributive equity.
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