Democracy is Undermined by the Financial Sector
By Finance Professor Marc Chesney[This article published on August 20, 2019 is translated from the German on the Internet, www.infosperber.ch.]
“The power of the markets undermines democracy,” Chesney concludes in his book “The Permanent Crisis – The Rise of the Financial Oligarchy and the Breakdown of Democracy.” He explains who are the markets often extolled in the daily papers and not only in the stock market reports. “Investment banks and speculative funds” manipulate or try to manipulate markets (the big exchanges in New York and Chicago leading the way) to strike it rich. They operate a gambling casino where financial transactions are handled at ever-faster speed as micro-second trading.
The power of these “markets” contradicts the basic principles of democracy. “The electronic financial markets determine the economic, financial and social orientation of countries.” Both left-wing and right-wing politics must submit to the financial markets. “This amounts to a form of dictatorship,” declared Marc Chesney. Therefore, “the choice today is between the dictatorship of the financial sector and a democracy where citizens take the future in their hands.”
Financial sector eludes democratic control
Chesney recalls a quotation from the first half of the 20th century attributed to the automillionaire Henry Ford. “It is good that the population of this nation does not understand the banking- and money system. If they understood this, we would probably have a revolution tomorrow morning.” This is truer today than ever, Chesney says. “The financial sector actually tries to evade all democratic controls by its sheer size and inscrutability.”
Big banks can operate a financial casino since “their CEOs assume the bank does not need to answer for the risks.” As then, the taxpayers may have to bailout the distressed big banks today (eg. UBS and Credit Suisse)…
The gambling casino
The system risk of a big bank is hard to describe. Big banks hide their high-risk gambling… In 2017, Credit Suisse had an incredible volume of 28 trillion francs with socalled derivatives… Only 0.2 percent of this astronomical 28 trillion serve real insurance functions. The rest are pure bets of a casino world of finance and market manipulators that only bring dangers and no benefits to the real economy. “Who can believe the situation is under control?” Chesney asks.
Derivatives
A derivative is a security or financial product whose price fluctuation depends on the price of another financial product, for example a share (=the so-called base value). With a derivative, one speculates whether the price of a certain product will rise or fall in the future. With that, one gains an option for buying or selling a security like a share for a certain price on a future date.
Bets are made on the future price of a security… One can wager that a certain business will not meet part of their future obligations or even go bankrupt or that a state goes bust and cannot pay interest or repay anymore. More ominously, mammoth financial institutes have the power to manipulate financial markets and try to win their bets.
Derivatives are perverted into bets
Derivatives can be useful instruments for businesses seeking protection from the risk of a payment failure or a change of the exchange rate. Derivatives called “credit default swaps” (CDS) can help provide insurance… However, CDSs only fulfill this useful function for the real economy in special or exceptional circumstances. As the reason, big banks, insurance companies and investment funds domiciled in tax havens - mostly under the control of big banks – and speculators – and can buy CDSs without covering their own risk. The purchase of a CDS can be a bet that a certain business or state will be insolvent without having to ever lend money to this business or this state.
What is allowed to powerful speculators with their billions on the “markets” is impossible in normal life, Chesney comments… Combinations of several derivations, socalled “structured products” that are so complex bank customers hardly understand them are included in the “bets of the casino world of finance.”… The finance professor sees a danger for private investor, pension funds and communities – and for democracy – in these structured products.
Defective mechanisms of the financial markets
According to economists, the financial markets should ensure an optimal distribution of capital and risks. But capital loses its productive character if it is used for betting instead of investments. The financial sphere has alienated itself from the spirit of entrepreneurship, Chesney argues. “Instead of the invisible hand, the hand of the roulette dealer of the casino world of finance acts for the big banks and the hedge funds.”
Politics invites speculators to attempt this again and again. The example of manipulating Libor-interests for years demonstrates this. UBS along with five big foreign banks are among the manipulators… “Profits are made with the “non-discovery of offenses,” Chesney says.
Penetration of democratic structures
“There are nearly 200 sovereign states on earth but a few dozen banks dominate globally,” explains Christoph Sabatini who teaches at the Columbia University’s School
of International and Public Affairs.” The Blackrock company manages properties amounting to $6.84 trillion (in June 2019). Blackrock, Vanguard and State Street – the three largest property management firms of the world- have assets over $14 trillion. They control a quarter of all the share of the largest 500 US firms according to a Harvard Law School study cited by the economic historian Tobias Straumann.
Big banks, mammoth insurance companies and property management firms with their concentrated financial power can successfully resist effective regulations. In his book, Marc Chesney writes: “The financial sector does everything so its interests come in first place.” Before the last financial crisis between 1998 and 2008, the financial sector in the US “spent” $1.7 billion to finance the election campaigns of its allies and $3.4 billion for lobby work. To influence the 2016 US elections – of both the president and the Senate and House of Representatives – Wall Street spent $2 billion according to Fortune Magazine. 55% went to allies of the Republicans and 45% to supporters of the Democrats.
Marc Chesney sees a power factor of the financial industry in its deliberately constructed complexity. People often assume the leaders of giant financial institutions understand and control this complexity. Many of them occupy the highest political offices. This is true for example for the former top managers of the Goldman Sachs bank Robert E. Rubin and Henry M> Paulson Jr, the later Treasury secretaries of the Bush and Obama administrations. These technocrats represented as neutral mostly carry out a policy that favors their financial institutes.
The
population is excluded
The powerful players of the financial industry largely exclude the public. As Chesney formulated, “the vast majority of the population is actually excluded from the debate around the risks of the financial markets and their financial inventions. This is serious for democracy and for taxpayers since they must ultimately answer for these risks.
The Zurich finance professor regards reducing the size and complexity of the financial sphere as “urgently necessary” so they can do justice to their role serving the economy and society.
Democracy in the grip of four empires
Our democracy is perverted by four empires according to Marc Chesney’s analysis because their lobbies exert too much influence in our society.
1) The military empire is “dis-proportionally large” and makes heavy demands for too many investments and energy that are missing elsewhere.
2) The energy empire: The production of shale gas and nuclear energy expose the populations to uncontrolled risks not covered by any insurance. The “gold standard” of the currencies was actually replaced by a “crude oil standard” since
the price for crude oil is quoted in dollars. Since then, the whole world economy is influenced by the oil prices. The “War against Terrorism” label that was often a pretext in Syria, Iraq and Libya to seize fossil fuel. Even in industrial states like Canada and not only in developing countries, oil- and raw material companies ensure that the billions flow past the people.
3) The empire of information technology. Even democratic states control populations which gives democracy a virtual character.
4) The financial empire is structured around the mega-banks that invade through buyouts and takeovers in branches like insurances, energy, metals or foods. They build their power without any government even thinking of limiting or ending this power concentration. In his book, “The Permanent Crisis – The Rise of the Financial Oligarchy and the Breakdown of Democracy,” the professor of finance Marc Chesney shows that Big Finance has shifted its main activity to pure speculation – instead of being a service of the real economy – and represents a real threat for the real economy and democracy. Revealing and not obscuring the character of this “financial casino” is urgently necessary.