Saturday, June 19, 2010

When The Market Has Cancer (guest essay)

I am honored to present another exceptional essay by Zeus Yiamouyiannis on the systemic rot at the heart of our financial system.

Fighting and Winning When The Market has Cancer: How Unregulated Profit Cannibalizes the Economic Body and How Democratic Citizens Can Effectively Respond (Zeus Yiamouyiannis)


Introduction:


As tragic as it is to see late capitalism kill itself with self-destructive practices, it is positively gruesome to witness late capitalism ravenously eating itself by plundering pensions, Medicare and Social Security reserves, housing equity, and almost any other available concrete store of accumulated value. Economic events of the last decade, have eerily echoed some of those same inadequate responses and ignored symptoms that one sees in a person with advanced cancer: neglect of early warning signals, hubris and overconfidence in the economy’s ability to regulate itself and recover, unhealthy living (spending way over one’s means in a way that defers debt and accumulates waste), and finally domination by private moneyed interest over the “DNA” of public life, over public governance and the public purse.


In steps, uncured physical cancer goes from being a parasite, to a predator, to a cannibal. The same is true with economic cancer. In its early stages economic cancer parasitically financializes the system and its victims, using debt to harvest increasing interest payments and hoard productivity gains. When that well runs dry, it acts as a predator by creating liar loans, phony derivatives, and private equity takeovers of productive companies to siphon profits and fees at an accelerated pace. In the end it simply cannibalizes stored “financial nutrients” and assets by decimating pensions, retirement accounts, etc. with duplicitous labeling (i.e. rating junk investments as AAA), basically mixing completely fake wealth with real wealth.


We are in late stage economic cancer right now. The economic body cannot distinguish between the diseased (fake) cells and the healthy (real) ones. Phony instruments of value have grafted themselves into national economies (check Greece, Ireland, and Iceland, and more to come), personal stores of wealth, institutional pensions, and future taxpayer obligation to the tune of tens if not hundreds of trillions of dollars. (http://www.marketoracle.co.uk/Article19454.html) So far we have buried evidence and smoothed over symptoms. What we need to do is acknowledge and account for the disease. Only then can sickness be addressed and a healthy response developed.


What a Healthy Society Requires, What a Sick Society Suffers From


Healthy cells require healthy food—substantial, fresh, high fiber, low glycemic, low caloric, high-vitamin and mineral nourishment. Healthy cells serve the free enterprise “commerce” of the body by lending themselves productively to the responsive and smooth running of the larger body. Healthy cells add something and take only what they need to optimally contribute. Their “mission” is one of maintaining vitality of connection and quality of “experience” between individual cells and the social body.


Free enterprise, well understood and executed, analogously prizes productivity, quality of life, quality of goods and services, innovation and creativity, transformative learning, honest and diligent labors of love, and enjoyable and engaging relationships and experiences for its citizen members. These are functions that create health synergistically both for the smaller and the larger, a win-win.


The mission of cancerous economic organizations is to maximize profit, withdraw as much energy as possible, and give as little back as possible. When “maximizing (financial) profit” is allowed to gain power without reference, balance, challenge, or duty, no other cherished capitalist principle can long endure.


Free enterprise gets swallowed by monopoly (especially over life necessities like health care) because captive markets and price fixing will always bring more money than honesty, competition, and fairness (especially when people are mandated by law to patronize monopolies). Customer service which is outsourced or downgraded will bring in higher quarterly profits by cutting costs, even as it undermines long-term viability by turning off clients and eliminating decent-paying jobs for potential consumers. Ironically, this course destroys the very system and people these cancerous organizations depend upon for their livelihoods, a lose-lose.


Physical cancer is caused by an alteration of the DNA. Look at how strikingly similar this description of cancer from Wikipedia aligns with what we are observing in our financial institutions (http://en.wikipedia.org/wiki/Cancer):



Genetic abnormalities found in cancer typically affect two general classes of genes. Cancer-promoting oncogenes are typically activated in cancer cells, giving those cells new properties, such as hyperactive growth and division, protection against programmed cell death, loss of respect for normal tissue boundaries, and the ability to become established in diverse tissue environments. Tumor suppressor genes are then inactivated in cancer cells, resulting in the loss of normal functions in those cells, such as accurate DNA replication, control over the cell cycle, orientation and adhesion within tissues, and interaction with protective cells of the immune system (my emphases).


The current economic disease is caused by a core mutation in the DNA of capitalism, which is now consuming the rest of the system. Derivatives serve as oncogenes fueling “hyperactive growth.” Political connections ensure that banks that deserve to die, according to the functioning rules of capitalism, remain standing. In fact, such banks have gotten even bigger as a result of the crisis, and they have become more deeply inserted in “diverse environments” (pensions, etc.). Deregulation serves to inactivate the tumor suppression defenses, overriding the normal productive functions of the economy.


Cancer cells display “uncontrolled growth,” that is expansion beyond normal limits, in addition to capturing an ever-increasing share of body resources. In cancer, the lifeblood of the body is being controlled by pernicious “self-interested” elements, whether in the physical body or the economic body, and disease and possible death are the result. Social “cancers” also result in moral degeneration: Cancerous social elements (economic, political, and cultural) metastasize from being immoral (against basic public rules of fairness and dignity) to amoral (believing themselves outside such rules) to anti-moral (anarchically asserting their own rules and forcing others to live by them).


Along these lines, high-rolling capitalist players, driven by a uncontrolled and unthinking mandate to “maximize profits” at any cost to others, have become increasingly bold in bypassing, subverting, or ignoring remaining regulation, transparency and accountability, taxes on gains, and reasonable caps to growth— basically any relevant limit or responsibility. They have also become more “creative” in establishing and passing off counterfeit markers of value as real.


Mechanisms for system renewal, maintenance, buffering, and repair are getting turned on their heads. Environmental and personal health, prohibitions against insider trading, concerns about quality, efforts to establish a “level playing field” or save money or defer gratification become vices, taking away from “opportunity.” Greed is becoming a virtue, obesity a sign of customer loyalty to fast-food industries. Real family and community values give way to politicized, corporate-friendly efforts to freeze or drop wages. Irresponsible borrowers sit rent-free in houses they bought but refuse to make payments on for months and even years, while the virtuous get to contend with inflated living expenses.


If you look at cancer cells under a microscope, they look bloated and misshapen. They do not contribute, and they suck energy from the body, the higher octane the fuel the better. Physical cancer loves processed sugar for this reason. Economic cancer agents love zero interest loans for this reason.


In order to succeed, maximum profit, like cancer, must mutate and co-opt its surroundings. No matter what argument can be made for expanding market for “green jobs” or pro-social goods, a more ruthless and effective short-term profit can always be made, in addition, by exploitation, fraud, and duplicity which siphons money and energy and discharges waste, risk, and liability. We need an effective analysis and response.


Analysis: How the Current Economic Cancer Operates


The context


Permitted practices, including destructive ones, derive from culture and moral commitments. They do not simply sneak in and assault societies.


The first thing many world citizens need to recognize is their own historical complicity with today’s events. Cancer, even that driven by genetics, requires a hospitable context to flourish. The generations that grew up after the Second World War provided just such a context for economic cancer by adopting an understanding of life as an entitlement driven by ability to own and consume. Technological and production advances, elation from the end of the war, a burgeoning middle class, and self-sacrificing Depression Era parents desiring to heap the amenities they never enjoyed on to their children, all contributed to a sense of economic “prosperity” based in material accumulation and enjoyment.


Anything that could increase my ability to spend, expand leisure, live lavishly, and enjoy convenience was myopically considered the American Dream. The commercials in the 1950’s around car-buying and kitchen appliances serve as great reminder. This all happened in happy disconnection from the systemic and collective effects of these individual desires and decisions.


The motto was basically: Maximize, maximize, maximize. Whether it was corporate profits, union wages and benefits, or the square footage of suburban McMansions, good = more. Furthermore, people’s sense of identity and self-worth became dependent upon this ethic. Maximum “growth” was the creed, along with a belief that possibilities for growth were infinite.


Forget that this was, is, and will always be a deluded and ultimately unhealthy assumption. Unreferenced growth for the sake of growth is exactly what cancer is. For it to be healthy, growth has to serve some productive, enhancing role, one that goes beyond momentary pleasure. Who would cheer a physical fever that escalated in temperature past the body’s breaking point? However, more than a few people were hailing the overheated bubble economies as evidence of a “new era” of unlimited wealth.


Evolving mechanisms for cancer capital


Once this “maximum growth at all costs” context is established and citizens willingly participate, it is a near given that the mechanisms and “creativity” around unreferenced, maximum growth will proliferate and become increasingly audacious and extreme in the search for new frontiers. Even if the physical limits of the “real,” asset-based financial system are reached, “shadow banking” systems and “unreal” financial instruments (i.e. derivatives) get constructed to keep the expansion going, which will not only cannibalize real assets but create fake assets.


In 1999, with the fall of the Glass-Steagall Act, separating investment banking from traditional banking, the last pieces fell into place for a two-tiered system: Private parties could extract economic gains through unregulated betting on the market in a “shadow banking” system, on one hand, and be backed by FDIC guarantees, Federal Reserve policy, and bailouts by public taxpayers for losses, on the other. There is perhaps no greater tenet to functioning capitalism than that which insists those who take risks both gain and lose on their merits. Without this, there is no need for merit or propriety, and there exists an open invitation to fraud. That core capitalist tenet was effectively abolished along with Glass-Steagall.


Once you allow a non-transparent, unaccountable, and unregulated system to be linked with the real economy and insured by real assets that aren’t even under the control of the offending institutions, you are giving yourself over to cancer capital. Capital must have reference in real assets for it to have worth. Without an effective “real worth” reserve requirement, banks can simply manufacture value on their say-so, and trade the counterfeit value for real money. The cancer capital cannot be distinguished from the real.


Without limits or accountability, you incentivize not only market manipulation, but market destruction and cannibalization for profit. What was most curious about the recent legal case involving Goldman Sachs and hedge fund trader and short seller John Paulson was that this case allegedly involved not only the deliberate engineering of investment portfolios to fail in order to make money from short selling them, but the placement of bets on assets that far exceeded the value of the underlying assets. There is no greater evidence of concocted value than to have bets themselves be worth more than the underlying assets bet upon.


Here are some of the more virulent recent cancer capital mechanisms:


Collateralized debt obligations (CDO’s): Package unrelated debt instruments like bonds and mortgage-backed securities, into levels or “tranches” of return based on the creditworthiness of underlying debt as estimated by the company selling them and without the buyer being able to access loan-level data (no conflict of interest there!). (http://www.nytimes.com/2010/05/16/business/16gret.html)


Synthetic CDO’s: Place bets (packaged as investment) for or against the debts owned by others. When you see the market about to collapse, partly through your own malfeasance, bet against the market to bolster your profits and stick some gullible pension manager with the worthless investment “opportunity” to profit from the collapsing “up side.” (http://topics.nytimes.com/topics/reference/timestopics/subjects/c/collateralized-debt-obligations/index.html?inline=nyt-classifier )


Credit default swaps (CDS’s): Unregulated insurance on default of debt, frequently backed by inadequate, phony, or over-leveraged so-called assets. Now apparently CDS’s are backed by the full faith and credit of the U.S. taxpayer as long as you are a too-big-to-fail CDS monger like AIG.


Naked short selling: The practice of selling shares without owning them (yes, you heard right) and then purchasing them or delivering them for a different price. Obvious criticisms are legion: creating “phantom shares,” market manipulation (artificially deflating demand and value by flooding the market with phony sells for a company), non-accountability (no security or personal stake, fact that uncompleted transactions end in a “fail to deliver” rather than a meaningful obligation on the part of the seller). (http://en.wikipedia.org/wiki/Naked_short_selling)


Repo 105 (Repurchase Agreement): Covers up liquidity problems by booking collateral extended for a loan as a sale of assets and the received loan as proceeds. Assets are often purchased back days later. If this is done just before a quarterly report it can make the company look a lot more solvent and stable than it is. In the second quarter of 2008, Lehman Brothers used Repo 105 to move 50 billion dollars off its balance sheet. (http://www.npr.org/blogs/money/2010/03/repo_105_lehmans_accounting_gi.html)


High frequency trading (HFT): Sift through the marketplace in milliseconds with high powered computers and complex mathematical algorithms looking for securities priced too high or low because the market has not had time to respond. Then, buy and/or sell securities in an instant, guaranteeing a small profit. These profits add up when garnered with high frequency. (http://www.huffingtonpost.com/2010/05/15/secretive-speed-traders-i_n_577557.html)


Capital cancer mechanisms thrive on:


1) Unlimited zero interest money: Nothing like getting money from the Fed bank window for nothing and buying up treasuries for a guaranteed return of billions of dollars. Instant liquidity in a box. Just mix taxpayer blood and serve.


2) Empty calorie money movement: Much like physical cancer, capital cancer loves high octane injection and circulation of easy money in its system. If it does not get it the easy way, by duping unwitting investors, it will create it the slightly less easy way by creating crises that require bailouts. Lending for productive purposes, schmending. Small business viability is not our concern.


3) Non-productive trading: Who cares if trades seem to serve no useful purpose. They generate transaction fees, and fees mean profits.


4) Accountability dodges: Like an effective cancer, non-detection and non-disclosure is crucial followed by non-treatment (i.e. non-enforcement). We have to make a system that will say and show anything we want it to.


5) Other people’s money: Still think the Social Security System has not already been privatized through government debt? Still think pensions are safe? I didn’t think so. When one plays with other people’s money and swaps it out for counterfeit cash or promissory notes and those people retire and seek medical care in overwhelming numbers, where is the real money going to come from? Can you say health care and retirement crisis?


6) Profitable ignorance: “No one could have possibly known this would happen!” I run the whole company, pride myself in my hands-on management style, get on the cover of Fortune magazine and reap obscene bonuses but when the fraud and misrepresentation piper comes calling, “I know nothing.”


Respecting the healthy limits of material and financial growth


Environmentally and financially we have hit the limits of uncontrolled growth. Replacement population is leveling off or even declining in so-called developing countries. Wages are flat or falling in real terms. Debt instruments and financial vehicles are savaging what is left of pensions and public savings. We have to face the music, whether we feel comfortable doing so or not. Cancerous economic side bets have exceeded the value of the assets they refer to. We cannot live on bets. We require healthy air, food, water, reasonable housing, and real health care to live.


Like the exploded oilrig hemorrhaging in the Gulf of Mexico, we are waiting for a miracle to be produced in our financial crisis by the very people and mindsets that created it. This will not work. Our own initiative has been weakened by decades of disuse, but it is still latent, ready to be exercised. It is time for us as democratic citizens to commit ourselves to the task of transforming crisis into productive, pro-social opportunity.


This will require relinquishing our false dreams about unlimited material and financial growth. We see now that these dreams are both unreal and undesirable. We are destined for a much higher and far nobler purpose. In agreeing to “feed the beast” of debt and non-productive economy we have had our happiness index go down, our working hours go up. Our time with family and community has suffered, and our individual time demands have skyrocketed. For a system that promised increased leisure, convenience, and fulfillment, the current system is a proven lie.


That is not a cause for pessimism but awakening. There is no tough choice here if we are simply willing to lose our illusions. We are currently supporting a system that is not only personally, socially, and environmentally unsustainable but desperately unfulfilling and inhumane as well. We have much to gain by transforming our purposes and practices.


Response: How to Regain Personal and Social Health


Just as with the human body, any system, capitalism included, requires a regulatory system. However, that is only the backstop. At its core, good health requires much more than the absence of disease; it needs affirmative and proactive generation of quality and vitality in life. It would be foolhardy to leave behind a well-preserved corpse and yet have lived a meaningless, self-consumed life. Democracy and its servant, capitalism, have presented us with an opportunity to transform, in addition to foisting upon us a formidable challenge. We need active, creative, caring, decisive, courageous citizens to take on this opportunity.


You don’t negotiate with, compromise with, or meet advanced economic cancer halfway. You cut it out, starve it, and hit it with follow up treatments, while simultaneously strengthening natural, native defenses and responses.


In order to succeed, we must fully come to terms with the unhealthy and frequently vicious guises late capitalism has adopted, and we need to stop supplying these guises with energy. Next, we need to conduct a thorough and honest examination about how our own quality and vitality of life and that of future generations has been both led astray and inhibited by an entitlement and consumption-based society. Only after waking up can we devise practices which both dismantle the cancerous elements and build up the productive and sound elements of a good life.


It is time to take an integrated approach to the comprehensive problem facing us. As with physical cancer, it is first important to identify, biopsy, and surgically remove economic, social, and personal lifestyle tumors. Next we clean up the vestiges and effects of the main cancer through economic radiation and chemotherapy (which may cause more than a little pain and trial). Simultaneously we employ “naturopathic” and holistic economic techniques to build up the foundation and strength of our economic body. All this is guided by new and evolving purposes, priorities, and technologies for our lives.


Economic surgery is accomplished by cutting out dependence on cancerous tissue. We can start to do this as citizens by what I offered in my last essay, “Unhinged: When Concrete Reality No Longer Matters to the Market (and What to Do About It)”



We can decide to rent or share housing and watch each other’s kids. We can decide to drastically reduce our consumption, thus saving the environment and de-polluting our daily life. We can move our money to community banks, directly invest into microfinance, or lend to each other through “circle lending,” cutting out the big banks and brokerages. We can help each other fortify and maintain our health through community programs and “medical tourism”, cutting out health insurance and medical industry parasites. We can set up or join intellectually, (creatively), and socially edifying cultural groups (cutting out Ticketmaster and the celebrity industry).

Economic radiation and chemotherapy treatment is accomplished through accountability. All the false money in the system must be tracked and extinguished. Complex financial vehicles (CDO’s, CDS’s, etc.) need to be exposed for what they are, counterfeit money, and their originators need to be criminally and civilly prosecuted, preferably using anti-counterfeiting laws. Losses being held off the books, i.e. houses in default, need to be counted. “Marked to model” needs to be replaced by “marked to market” (or at least some reasonable baseline, i.e. inflation index, if one is worried about panic-driven depreciation below the reasonable value of assets). Big banks need to be broken up and have their investment activities divorced from lending and savings.


Naturopathic and holistic economic strengthening would involve direct re-investment in communities, small businesses, housing, credit unions, local banks, etc. with the proviso that this money goes to local, productive enterprises. This would not involve larding hundreds of billions of dollars on multinational financial corporations and begging them to extend credit. Local food movements, farmer’s markets, local currency and trade for services, would all help people meet their basic needs while strengthening rather than sucking from the lives of real people. This would also have the benefit of enhancing what I will describe in the next section as “intrinsic goods” and “relationship capital.”


Conclusion: A New Economy


What would it look like if we actually had an economy and society built around things that matter most to us? What should we do when we realize we have not only become debt serfs under an economy that is wantonly destroying itself, but that we have neglected the very central reasons for living our lives?


The present failing and corrupt notion of economy paradoxically encourages citizens to glut themselves on momentary, superficial pleasures while deferring the tough choices and deeper issues until later. What if we accepted the tough choices and deeper issues now as critical and creative challenges to spirited engagement with life?


What if we asked and pursued the foundational questions: “What is the economy and society meant to serve? What is most fulfilling and important in life?”


When asked these questions for themselves and their societies, most people offer answers like: health, family, community, friendship, love, learning, creativity, collaboration, liberty, new experiences, diversity, meaningful work, cultural enjoyment, literacy, curiosity, responsibility, spirituality, faith, and so forth. If you ask those same people how much time, energy, and money they are spending enacting these practices, principles, and values, the answer would likely be (if it were honest), “Comparatively little.”


“I’m too busy working to pay off my overinflated home mortgage. I’m too busy trying to make a killing in the stock market, housing market, etc. I’m too busy having my money ‘work for me.’ I’m too busy unwinding, watching TV after another grinding day at work. I’m too busy worrying about my cratering retirement savings.”


Aristotle said, “We are what we repeatedly do.” He was right. Do we like what we repeatedly do? Do we like who we are as a result? If not, then we need to change what we do, and thus who we are in the world, to reflect our deeper personal sensibilities and commitments.


What would a society look like that facilitated this deeper looking and action? It would be a society that recognized “instrinsic goods” (non-material sources of value, meaning, and livelihood) versus merely extrinsic goods (the production, manipulation, refinement, and measurement of physical objects). It would produce, affirm, and share emotional and interpersonal literacy, moral virtues, enjoyable and enlightening experiences, worthwhile learning, and it would reinforce humane and rigorous social and mental character through its educational, cultural, and economic systems. It would develop modes of exchange that recognized the value of unpaid work and other forms that contributed to social and personal health.


There would also be, in this new society, “relationship capital,” beyond what we now call resource capital and human capital. Relationship capital, would be an additional currency created by the value-added social exchange of intrinsic goods. We see this source of value operating in the popularity of "simplicity" movements, in consciousness groups, and in social choices as more and more people, young and old, trade down salary for what Richard Florida (author of The Rise of the Creative Class Life) calls "amenities." Amenities are essentially relationship capital “perks”-- pleasant work environment, friendly people, meaningful, pro-social work, and so on.


These are only a few broadly sketched ideas summarizing and forecasting possibilities that are already present in our world. It is clear that non-material sources of value are increasingly influencing rational behavior and concrete choices, in addition to aiding the search for meaning, integrity, and love. It will be up to us to translate these vague but intriguing possibilities into a new economy and a new way of being in the world.




DailyJava.net is now open for aggregating our collective intelligence. New Posts.


Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from amazon.com or in ebook and Kindle formats.A 20% discount is available from the publisher.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle


Thank you, D.M.T. ($300), for your completely outrageous generosity to the site and your continuing encouragement--I wish I could thank you with a personal note-- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.


Our Commission Policy:
Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP