Boston University economic professor Perry Mehrling discusses his recently released INET book, in collaboration with Cambridge University Press, "Money and Empire," which chronicles the life of Charles P. Kindleberger and how he helped shape the emerging global dollar system
Promoters plugged crypto as the key to accelerating Black America’s path to prosperity. It was going to level the playing field once and for all. The world of cryptocurrency was painted as a welcoming place for Black investors leery of traditional finance, a golden opportunity to build wealth and achieve financial empowerment. There was lots of talk of big returns, and few warnings of risks. Exuberance took hold.
But when markets began to crumble, Black people were left holding the bag. Many investors who came in after 2020 are now underwater; some have said goodbye to their life savings. Last in, hardest hit.
This, alas, is nothing new. As economist Peter Temin explores in disheartening detail in his recent book, Never Together: Black and White People in the Postwar Economic Era, Black Americans have operated from the get-go in an entirely different economy from whites. When they’ve tried to get ahead, they’ve been terrorized, cheated, discriminated against, redlined, saddled with debt, exploited, blocked from starting businesses, prevented from owning land, and relegated to the lowest-paying jobs. Inequitable policies and structures have been in place since colonial times, and we are still living in “colonial Virginia writ large,” as Temin describes it.
Wealth has never been distributed evenly. Neither has the pain when things go belly up.
That’s just what happened in 2022 when the crypto market blew up catastrophically. Instead of bringing them into the economy, crypto put Black communities at risk. Rather than helping them close the wealth gap, it overexposed them to scam and fraud.
In an age when calls for racial justice are on the lips of so many, and barely a decade after the mortgage debacle of 2008, which disproportionately walloped Black families and communities, how could we allow this to happen again? The beginning is always a very good place to start.
Birth of a Dream
The dream of crypto followed the nightmare of the 2007–2008 financial crisis when people lost trust in the global financial system and the government. A form of currency that needs no government backing, beyond the reach of regulators and central bankers, was sold as the first step to a fairer and happier future. For everybody except bankers, of course, who were bailed out.
Hunger for new currencies during anxious times is not novel. During the Great Depression, all kinds of paper and tokens were circulated as currency, even things as weird as clam shells and rabbit tails. In 2009, Bitcoin was launched by a mysterious developer (or developers) known by the pseudonym Satoshi Nakamoto. First, it was a cult, then a fad, and soon enough, a movement.
A shimmering promise of a coming golden age.
Bitcoin shot up in value after the 2013 financial crisis in Cyprus scared people with bank savings, who faced a one-off levy as part of a eurozone bailout. A currency free from government raids was suddenly extra-enticing.
Libertarians swooned. Tech bros called Bitcoin the beacon of a new alternative tender movement. It was all about clever, future-focused people coming together to give the finger to big banks and the government. We don’t need you!
A whole industry ignited. As peer-to-peer currency took off, new altcoins with delightfully absurd names started popping up everywhere: Dogecoin (after the Shiba Inu dog); Whoppercoin (in homage to Burger King); Potcoin (favored by the marijuana industry); Polkadot (what could be more fun?); and Ethereum (named for ‘the hypothetical invisible medium that permeates the universe and allows light to travel’).
Financially naïve Millennials led the charge. All of a sudden, those slips of paper decorated with Masonic symbols in your pocket seemed embarrassingly retro. The mysterious wonkery of crypto was fed into mainstream consciousness by celebrity endorsements, starting with the photogenic Winklevoss twins, famed for suing their Harvard classmate Mark Zuckerberg for stealing their social media idea.
It was quite a party. Who wouldn’t want to join?
What They Didn’t Tell You
If you can easily afford to lose everything you put in, crypto isn’t a problem. Just like at the blackjack table.
For everyone else, the problem is that the idea of a safe, stable currency minus government is a libertarian fantasy. Here’s why: Everyday money in modern states is paper, with its status guaranteed by governments (set gold aside -- there’s never enough of it and it’s hard to carry around). By law, it must be accepted for the discharge of debts and payment of taxes.
Governments in the modern world also stand behind major banks, whose deposits are money. But absent this structure of support, most money becomes purely a conventional item, and if conventions change, it’s worth. . . exactly nothing.
Can you buy anything with a clamshell today? Unlikely. Who really has to accept crypto today, or tomorrow? Nobody, although if you’d like to invest in a Ponzi scheme, they’re currently taking it.
If you get scammed or robbed in Cryptoland, who do you go to? You didn’t want the government involved, so what’s your recourse? There isn’t any.
Many have derided crypto itself as a Ponzi scheme, like computer scientist Nicholas Weaver of the University of California at Berkely, who put it this way: “Cryptocurrency is a self-assembled Ponzi scheme made up of Ponzi schemes, stock frauds, and other financial scams.” Others compare it to early American wildcat banking, where banks issued their own notes with minimal regulation.
Some view crypto as little more than trendy speculation – i.e., the type of financial transaction that has a substantial risk of losing all value, like the infamous Tulip Mania of the 17th century. Only with Tulip Mania, at least you got a bulb. Crypto is not even a useful object.
Another problem with cryptocurrency is regulation, which is detested by many crypto enthusiasts in love with the idea of decentralization. At the moment, regulation is a stinking hot mess, pretty much the “Wild West,” as current SEC chair Gary Gensler described it.
Crypto Invades Black America
You might think of crypto as mainly the purview of young white tech bros. But you’d be wrong. Black investors had more invested in cryptocurrencies than their white counterparts when the markets exploded. Because they came in at or near the most recent peak, many of those investors lost more than whites.
A lot couldn’t afford it. As the New School’s Darrick Hamilton has explained, racial economic disparity in America has persisted in large part because of the grinding obstacles Black Americans face in building generational wealth. This makes them much more vulnerable to economic shocks.
In the early days of crypto, Black investors were wary. But when Bitcoin and other digital assets started to surge in value, they went in, enticed by promises that this was the way to bypass a traditional financial system that many never trusted. Phrases like “financial inclusion” and “economic empowerment” were balm to old wounds.
Hype was in the air. In 2015, the movie “Dope” featured a group of Black teenagers who use Bitcoin to thwart a financial criminal. Black celebs tantalized newbie investors, like actor Jamie Foxx, who jumped in as an early celebrity crypto endorser and promoted the token sale of Cobinhood, a free cryptocurrency trading exchange (which recently shut down for a month and just axed real-time customer service). Boxing legend Mike Tyson declared himself “all in” with cryptocurrency Solana (which recently cratered), while rapper 50 Cent and football player Cade Cunningham “joined the Bitcoin revolution,” asking for payment in crypto.
The products were marketed as the antidote to racial inequality. It was accessible – you didn’t need a bank account or a great credit history to invest. Sinclair Skinner, a celeb of the Afro-tech world and co-founder of BitMari, the “largest Pan-African Bitcoin wallet provider,” linked traditional banks to the slave trade and proclaimed that Black people could finally take control of their finances with crypto. “Instead of waiting for politicians to change our communities, we think we can use the technology to create that change and build wealth within the global Black community,” he said.
Kim Kardashian got crypto fever. 32% of Black Americans trusted the pop culture legend in financial matters (compared to 19% of all adults), according to a Morning Consult poll. (Kardashian will now pay $1.26 million in a crypto-related fine to the SEC). The same poll also found that Black adults were more likely than other groups to say they’d invest in crypto based on an endorsement from a celebrity or influencer.
Politicians of color got in on the action, like Miami mayor Francis Suarez, who pushed the cryptocurrency Miami Coin (worth essentially nothing today), vowing to make his city the “crypto capital.” (The FTX Arena, home to the Miami Heat, just had to change its name in a hurry). Meanwhile, New York mayor Eric Adams, another early devotee, aimed to make his city crypto ground zero and opted to have his first three paychecks paid in cryptocurrency – just before the Bitcoin crash. He has called crypto “the future of commerce” and remains bullish today. (But he’s not taking his paycheck in crypto anymore).
As the coronavirus spread through Black communities in 2020 and 2021, the crypto-virus spread with it. Promoters said it was a prudent financial investment, a hedge against inflation. Black content creators were gaining increased visibility during this time, and the momentum for racial justice was growing, heightening the appeal of race-related marketing.
In 2021, hip-hop billionaire Jay-Z, the ultimate entertainer-turned-entrepreneur, bought an NFT (a digital product built using the same kind of programming as cryptocurrency) called CryptoPunk and made it his Twitter profile picture. He even launched “Bitcoin Academy” at the Brooklyn housing project where he grew up, styling it as a series of free “financial literacy” courses to be taught by Black internet sensation Lamar Wilson, who runs the website Black Bitcoin Billionaire. (Residents were not amused: as one woman put it, “People looking to make money, not lose it”).
In a 2022 Superbowl ad for Crypto.com, basketball superstar LeBron James gave advice to his younger self: “If you want to make history, you gotta call your own shots.” It was all about independence, Black power. Crypto was the name of the game.
The result of the hype-tsunami? According to a Pew Research Poll, by 2021, 18% of Black Americans were invested in, traded, or used crypto, compared to only 13% of whites. Many were investors who had shied away from traditional stocks. By April 2022, an Ariel and Charles Schwab survey of 2,000 Americans found that 25% of Black investors owned cryptocurrency, compared to 15% of white investors.
Darrick Hamilton, long skeptical of the crypto craze, feared that a crash was coming and that it was going to clobber Black investors and communities. As he told me, “It’s low entry and it’s targeted to Black investors. And it’s like a casino, where Black people also get hit harder.”
Dreams Die Hard
2022 was the year the new nightmare set in. Hot went cold in what came to be known as the “crypto winter.” The Fed was raising interest rates, causing investors to feel bearish. Many pulled back on crypto. Prices began to fall, and then things really got ugly. High-profile companies started going bust, bringing the price of digital currencies into freefall.
First, it was terraUSD, an “algorithmic stablecoin” pegged to the U.S. dollar which turned out to be anything but stable. It tanked so spectacularly that people compared it to the Lehman collapse of 2008. That, in turn, set off the bankruptcy of Three Arrows Capital, a hedge fund exposed to the coin. And it went on from there.
In November, FTX, a heavily-used cryptocurrency exchange, crashed faster than you could say “fraud alert,” sending billions of dollars up in smoke. Investors watched in horror as 30-year-old crypto king Sam Bankman-Fried, founder of FTX and crypto hedge fund Alameda Research -- and one of the planet’s richest men -- was indicted on eight criminal charges including wire fraud, conspiracy by misusing customer funds, and violation of campaign-finance laws. He’s now under house arrest at the home of his parents, where he plays video games.
Today, the price of a single bitcoin has plummeted from a peak of more than $68,000 in November 2021 to about a third of that. Cryptocurrencies as a whole lost more than $2 trillion in paper value.
And it’s not over yet. The crypto lending firm Genesis has just filed for bankruptcy – another multi-billion dollar blowup. Among those exposed? Pension funds. Though, not economist Larry Summers, former U.S. secretary of the treasury, who quietly exited from DCG, which owned a big share of Genesis, some weeks ago.
Crypto was and remains a cesspool of fraud. Hackers can steal it. Studies indicate that insider trading on exchanges is rife. A dirty trick called “wash trading” artificially pumps up asset prices and draws in novice investors. (Up to 70% of transactions on unregulated crypto exchanges are reported to stink of this practice). Then there’s the “rug pull,” which is what happens when a crypto development team hypes a coin and then suddenly grabs the liquidity and high-tails it out the door.
As an inexperienced investor, how can you tell fraud from fact? Hype from reality? You can’t. Plenty of seasoned investors have been fooled. Billionaire Peter Thiel, a man quite convinced of his own genius, drank the Kool-aid, rhapsodizing that crypto holds out “the prospect of a decentralized and individualized world.” Then he reportedly choked on FTX, though he more recently claimed to have gotten out early.
There’s no clear way forward, which means that for now, your protection as an investor is basically nil, and market stability is impossible.
In the U.S., regulatory attention has been, let us say, somewhat lackluster. True, President Biden signed off on some new crypto legislation related to taxes in the $1.2 trillion bipartisan infrastructure bill late in 2021. But did that do anything to curb the catastrophe that unfolded in 2022? It did not.
The legal framework for crypto regulation is clear as mud. Is crypto a commodity or a security? Should it be under the supervision of the SEC or the CFTC? Both? Also unclear, but if it’s a commodity, as many crypto champions claim, it’s mainly overseen by the CFTC, which is far more lenient than the SEC. Dennis Kelleher of Better Markets just reacted to the CFTC’s announced regulatory agenda related to crypto. His conclusion? Its supervision is “AWOL” and the agency is a “cheerleader for the industry.” Robbin Wigglesworth of the Financial Times called the CFTC “a friendly champion of a fraud-riddled dumpster fire it purportedly wants to supervise.”
In 2023 crypto’s structural problems remain in place, but many Black investors are still in the game. Asset prices have risen a bit, and crypto miners and speculators are getting excited again.
Congress and the SEC continue to investigate what changes may be needed, but they haven’t made much headway. Recently, the U.S. government exerted some pressure on crypto crimes by cracking down on Bitzlato, a Russian cryptocurrency exchange, for cross-border money laundering. So congrats on that. Over in Congress, Patrick McHenry (R-NC), the incoming chair of the Financial Services Committee, is creating a subcommittee on digital markets to be led by French Hill (R-AR).
But don’t expect the wheels of regulation to move quickly. This prediction is related to the fact, as Politico has reported, that crypto-funded super PACs forked over millions in the midterms to insure that politicians of both parties would do regulation their way (Crypto Innovation PAC, a GOP-focused group, spent $167,000 on Patrick McHenry).
CoinDesk reveals that one in three members of Congress took money from Sam Bankman-Fried and other former FTX executives. INET research by Thomas Ferguson, Paul Jorgensen, and Jie Chen shows that the mountain of cash SBF and his associates dropped on Democrats and Republicans alike was even bigger than the media have reported, “over $89 million dollars since 2019, with the bulk of it coming during the 2021-22 political cycle when the campaign to keep crypto clear of federal regulation swung into high gear.”
Meanwhile, America’s road to racial economic inequality is getting even rockier.
A recent NPR/Robert Wood Johnson Foundation/Harvard T.H. Chan School of Public Health poll indicates that during the period covered (May 16 – June 13, 2022), 55% of Black Americans reported having serious financial problems, compared to only 38% of whites. Black respondents were more likely to say they lacked adequate emergency savings or food and feared evictions.
In December 2022, the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System held meetings to discuss the U.S. economic outlook, the minutes of which contained an ominous view of America’s workforce. As reported, “a number of participants commented that as the labor market moved into better balance, the unemployment rate for some demographic groups—particularly African Americans and Hispanics—would likely increase by more than the national average.” In other words, the Fed knows that its actions to curb inflation will disproportionately hit people of color.
Does anything in this picture suggest that America is committed to the promise of prosperity for all? Black Americans need ways to create economic security, but politicians on both sides are now talking about cutting Social Security and Medicare. They need to build wealth, but the key to doing so, obtaining a first-rate, affordable education, is next to impossible for many. (According to the National College Attainment Network, less than a quarter of public universities and colleges are considered affordable). Investors need protection against the predations at a time when even an august institution like Fidelity is allowed to push crypto on workers trying to save for retirement.
Crypto is really just a fever dream of casino capitalism – ironically one born of fears about that very system. Calls to leap into the future digital world sound all the more enticing when things in the present real world are stacked against vulnerable people – not just Black Americans, but basically everyone who isn’t rich. Until things get better here and now, dangerous future-fantastical illusions like crypto will continue to thrive.
Growing consolidation in localized hospital markets appears to restrict nurse wage growth
Rolling waves of consolidation have significantly decreased the number of hospital systems in the U.S., leading to dominant regional systems. Increased concentration potentially affects industry quality, prices, efficiency, wages, and more. Much of the consolidation research is focused on merger events and estimating effects on the merged entities. In contrast, our new working paper is not based simply on merger data but takes account of the overall increase in consolidation across the country without respect to cause.
Specifically, we use the intensity of changes in hospital system consolidation in metropolitan statistical areas (MSAs) over two periods to estimate its effect on the wage growth of higher-earning professional workers—in this case registered nurses. We focus on registered nurses as a homogeneous group of workers with some degree of industry-specific education and skills. Registered nurses represent the largest single occupational classification in hospitals and urgent care centers, representing one in four workers.
Understanding the dynamics of local healthcare labor markets is critical given the importance of the sector for the U.S. economy; even more so in the wake of the pandemic amid continued uncertainty around long-term effects (e.g., early retirements, career shifts, education delays). Moreover, labor shortages among hospital-based nurses, which may be a symptom of monopsony, have been endemic in the industry for many years. The wages of nurses were stagnant between 1995 and 2015 despite increasing demand for healthcare over the same timeframe even as it was the only sector that added employment during the Great Recession. Explanations for the stagnation of nurse wages—in one of the more highly unionized professional occupations in the country—are not readily apparent.
Like many studies, we use a geographical location specific (i.e. MSA-specific) Herfindahl-Hirschman Index (HHI) to measure the intensity of change in hospital concentration. We use American Community Survey data to amass our sample of nurses for two periods: 2007-11 and 2015-19. It was necessary to pool multiple years of ACS data to get a sufficient number of MSAs—each MSA requires a sufficient sample of nurses to be included.
We end up with 214 MSAs under study. Most have less than 20 hospitals with a median of five, and HHI scores in the first period that range from 0.035 to 1.00. The smallest MSAs had to be excluded from the sample due to insufficient data. Large MSAs tend to have many hospitals and have the lowest levels and growth of concentration. The majority (77 percent) of MSAs have an HHI index above 0.25, which is considered highly concentrated by the Federal Trade Commission. The largest increases in HHI scores have occurred in smaller MSAs, thus accounting for MSA size in our model is crucial.
We design an MSA-level quasi-experiment to estimate a simple linear equation that describes the wage growth of nurses as a function of national wage trends, MSA-specific baseline wage trends, and changes in hospital consolidation while also accounting for economic trends and hospital effects. One challenge to this research is how to account for heterogeneous MSA-level baseline wage growth that may confound the effect of consolidation. We opt to incorporate a flexible nonparametric pre-processing data step that allows us to net out MSA-specific trends. We use GenMatch, a statistical matching package, to apply a complex algorithm to match four ‘analogous’ workers to each nurse by MSA, year cohorts. Matches are based on worker and demographic characteristics from American Community Survey data. Wage growth of the analogous workers is used to net out MSA-specific baseline growth, leaving a standardized measure of nurse wage growth used in the subsequent parsimonious parametric linear regression analyses.
Results from our preferred specifications that take market size into account are highly suggestive that increased hospital system consolidation in smaller MSAs (i.e. MSAs with less than 5 hospitals, excluding the smallest not in the study) is adversely related to nurse wage growth. Coefficients from our set of regressions that interact HHI growth with a small-MSA dummy variable give consistent results across the three specifications: ‑8.95, ‑8.53, and ‑7.03 (coefficients are significant at the 5% level, not statistically distinguishable). The effect attenuates without a control for MSA size.
These estimates translate into a wage penalty for nurses of $0.70 to $0.90 per hour for every 0.1 increase in the HHI consolidation measure. The standard errors, however, are quite large—a 95 percent confidence interval around our preferred estimate spans from a large negative effect to a slight negative effect (-13.64 to -0.42 from a point estimate of -7.03). The average hourly wage of nurses in small MSAs is $35.22 in the second period. Applying a 0.1 increase in consolidation—a typical increase for smaller MSAs with increasing consolidation—means that hourly wages could have been $0.70 higher, suggesting a 2% wage cut. This is a result that could add up to very large wage losses given high degrees of hospital consolidation. This is on top of our secondary finding that real hourly wages for nurses grew less than that of comparable workers by $4.08 per hour which identifies a relative gap in nurse wage growth.
Results presented here strongly suggest that growing consolidation in localized hospital markets restrict nurse wage growth. This research has policy implications for antitrust regulation and healthcare policy given that authorities primarily focus their attention on merger activity. Our results indicate that it may behoove them to broaden their monitoring and enforcement lens and pay attention to other ways that consolidation occurs, for example through hospital closures, leading to heightened levels of concentration that change degrees of monopoly and/or monopsony power.
One caveat to this study is that smaller MSAs and rural areas are not included due to data limitations. Further exploration, perhaps utilizing administrative data on nurses, may provide more insight into the dynamics of smaller market concentration.
Increased hospital system consolidation in small Metropolitan Statistical Areas is adversely related to nurse wage growth.
A Bank for International Settlements study says 60+ trillion dollars of off-the-books currency swaps could be a profound, systematic risk. Rob Johnson joins Paul Jay on theAnalysis.news.
Hi, I’m Paul Jay. Welcome to theAnalysis.news. In a few seconds, I’ll be back with Rob Johnson to talk about a ticking time bomb in the global financial system.
I hate to be the bearer of more bad news, but there’s a story that appeared in the Business Press but received almost no attention in mass media. I think capitalism is in chaos and is out of solutions. If the climate crisis wasn’t enough to convince you, here’s another example.
Bloomberg reports, “there’s a hidden risk deep inside the global financial system, embedded within $65 trillion of “dollar debt” held by non-U.S. institutions via currency derivatives, according to the Bank of International Settlements.” Okay, if you don’t know what all that means, we’re going to get into that soon. Just know all this could affect our lives in dire ways.
Now, back to Bloomberg. “Banks headquartered outside the U.S. carry $39 trillion of this debt— more than double their on-balance sheet obligations and ten times their capital. Shadow banks— otherwise known as non-bank financial intermediaries— have increased their dollar swap and forward liabilities to $26 trillion, which is twice the size of their on-balance-sheet debts.”
I’m going to take a crack at interpreting this. Dollar swaps are when– say, a non-U.S. pension fund, corporation, or bank needs to do a transaction in U.S. dollars but holds Euros; they agree to do a currency swap with a partner who holds U.S. dollars and wants Euros. These can be of enormous size– hundreds of millions of dollars, sometimes swapping overnight or in just a matter of a few days, but it can also be longer. Sounds reasonable. But wait a minute. Now we’re going back to Bloomberg again.
“Non-US banks have almost $40 trillion of hidden dollar liabilities from FX swaps and forwards, nearly three-times their recorded dollar debt. Accounting conventions only require derivatives to be booked on a net basis, so the full extent of the cash involved isn’t recorded on a balance sheet. This is what’s keeping the BIS up at night.”
Reuters reports, “the $80 trillion-plus hidden debt…” that’s even more than Bloomberg said, “… $80 trillion-plus [“hidden”] debt estimate exceeds the stocks of dollar Treasury bills, repo and commercial paper combined, the BIS said.” Again, what does all this financial gobbledygook mean? Well, in short, there could be a ticking time bomb in the global financial system that could trigger a crash, something similar to 2007 and 2008. That means millions of people around the world are falling further into despair, losing homes and losing jobs– a devastating effect for all of us ordinary folk who have little to no knowledge of what’s going on in the financial sector.
Now, joining us to make sense of all this is Rob Johnson. Rob is the President of the Institute for New Economic Thinking [INET]. In his multi-faceted life and career, he was, at one point, Chief Economist of the Senate Banking Committee at the time of the ’87 stock market crash in the savings and loan crisis. He is also known as the man who helped George Soros [Hungarian-American businessman and philanthropist] and Stanley Druckenmiller [American investor] break the bank of England; that’s a whole other story– you can look it up. He now fights for the regulation of the financial system, as Rob says,” in ways to have the financial sector generate economic growth, balance and limit predatory value extraction,” which ain’t happening much now. Alright, thanks for joining me, Rob.
Yes, it’s my pleasure. This is, how would I say, an important and treacherous domain that you want to explore.
So, Rob, all this stuff is so complex that people not involved, and I suspect a lot of this complexity is deliberate, so people not involved don’t understand it. If it wasn’t for a few articles in the Financial Press, nobody would even know of this BIS report. How dangerous is this warning?
Well, a number of things come to mind. First of all, I want to encourage people to get better acquainted with the Bank for International Settlements. The various people there, Bob McCauley, Hyun Shin, and others, are at a multilateral institution in a time of globalization, and they are studying the fault lines and flaws in the system. Whether it be in the old days, how the Asian companies all borrowed dollars and then brought the money into renminbis so they could have a U.S.-China crisis, as they had in 2015, or what we might call swaps and forwards mismatch, they’re talking about now. They look for the vulnerable, the weak links, or the fault lines in the system.
How dangerous is this warning?
Well, I think the scale that we’re talking about, the $39 trillion, etc. tells you that if something slips, like if you step on the banana peel– what they talk about in their report is the central banks will then all have to come in and open the spigots. In other words, if there’s a dollar shortage and it creates a frenzy, they’re going to have to supply the dollars to put out the fire. What that comes down to is what I have referred to in the work I’ve done on finance as the ‘mother of all moral hazards’. If you know the central bank can see the big institutions creating something that’s dangerous for the whole world, the central bank has no choice– what we might call an organ of public policy– but to try to put out the fire. But if you know they’ll put out the fire, you may take more risk knowing you’re going to get underpinned. What we need is a system where they’re there to rescue, but they also have the capacity to evaluate these institutions, have proper reporting of their positions, and which you might call impose prior restraint.
Okay, just for a second before we get further into this, just so people understand the dynamic here– if a Japanese company wants, I don’t know, Canadian dollars, say, some other company, bank, financial institution, or pension fund has Canadian dollars but wants yen, and they can do a swap. Eventually, they will resolve this swap, and this money doesn’t go on the balance sheet until the whole transaction is completed. At any rate, it all sounds relatively benign. Why is it dangerous?
Well, if you’re saying all of these institutions are fine in terms of their balance sheet, integrity, and so forth, and they’ve made a deal to go from dollars into yen, and 30 days from now, come back out, the difference between the price today and the price 30 days from now depends upon the interest you’d earn– what they call interest rate arbitrage.
Let’s say the U.S. has a 3% interest rate and another country, say Italy, has a 6% interest rate, so if you borrow dollars and then invest in Italian lira, you’re going to borrow at 3% and earn at 6%. Then when you close it out, there is an anticipation in what’s called covered interest parity– these are technical terms. If the Italian lira is going to pay you 3%, let’s just say over a year, if they’re going to pay you 3% over a year more than what you borrow for dollars, the exchange rate is going to depreciate by 3%, meaning the dollar lira currency rate, and so that the net, it’s an even deal. You can either be in dollars and earn 3%, or you can be in lira and earn 6% with a 3% depreciation. If that’s all a closed system, and there’s no solvency risk on either side, and everybody honors the contract, then it’s fine.
Now we move to some of the peculiarities. For instance, not every country and not every country’s borrowers are as high integrity as others. So a country like Germany or a country like the United States or Switzerland might have a more solid financial system than some of emerging Asia, Latin America, or other places. When you engage in these contracts, if the borrowers who are borrowing dollars and are supposed to repay start to have a fear of default risk over that one-year horizon that I used hypothetically, it could be three months or one month, then they may not come back and repay and retire the debt. In other words, the hole that’s created by the fear of bankruptcy or insolvency of institutions is what you might call a void that must be filled to protect the quality of credit. If these are small numbers and short-term things, they don’t tend to be as dangerous. If everybody is considered properly monitored and regulated, and all of the financial institutions that are engaged have enough capital set aside, which you might call a safety buffer, then everything can balance out. If it’s all done on a small scale, it doesn’t have systemic effects. But when you have tens of trillions of dollars spread across a world system that has very different qualities of regulation and integrity of financial institutions, the BIS is warning us that if something collapses in one place or another, the ability to honor the roundtrip contract will be suspect, which will lead to speculation on it blowing up, which will exacerbate the blow-up. In other words, some smart people will see, say, on a Ukraine crisis where a country that’s very dependent upon oil, their balance of payments will deteriorate, and then can they finance things, etc. In other words, financial speculators are smart, and when there’s a fault line, if it’s getting bigger, they put more pressure on it.
So it can become, like, in the midst of a moment of crisis that might even be triggered by something else, like what happened in ’07 and ’08, subprime or something like the fall of Lehman Brothers, one crisis can trigger the other. This gets triggered, and because it’s on such an enormous scale, there’s no way to evaluate just how risky it is because we actually don’t have a handle on how much off the books there is.
I think one document, maybe it was the BIS report, said the amount of outstanding off-the-book debt and the debt on the books; if you combine it all, it is like equal to the whole global GDP. The numbers are staggering.
Yeah, let me take you back in history a little bit. Enron appeared to be a very successful corporation, and they created things off the balance sheet called special purpose vehicles. They did a lot of their transactions there, in what you might call hid their losses there, so their holding company looked like it was very profitable, and their stock looked like a good investment. But when those off-balance sheets, special purpose vehicles, were revealed, then the whole picture changed, suddenly.
In the 2008-2010 crisis, what they call the Great Financial Crisis, many of the big bank holding companies had lots of special purpose vehicles, which had big holdings of derivatives in other countries and other places that were not disclosed to the regulators. So let’s talk about it. If you allow structures where people can hide their position, you’re creating the potential for danger. If you don’t allow regulators to impose what I’ll call capital requirements on each position you take, then the system is more fragile and more risky. The first thing you need is proper disclosure of what positions you have. The second thing you need is an understanding that the regulatory authorities can put that safety cushion requirement on you while you go out and play in the private markets.
What the BIS is alluding to here is we’ve got undisclosed and hidden positions, potentially on a very high scale, and we have not got uniform global regulations. This is what I will call the examination, the scrutiny, the enforcement, and the requirements of capital are not uniform. Then obviously, the world can have events that economists refer to as shocking the system, which suddenly changes the perspective. Then people go into a bit of a frightened frenzy because if they don’t know what positions their counterparties really have, they get scared, become more cautious, everybody runs to safety, and it widens these fault lines and leads to what you might call the propagation of fear and the propagation of damage. That’s what draws the central banks and finance ministries in to bail out these guys, and like the 2008 crisis in the United States, as Joe Stiglitz once famously said, “the polluters got paid.” Then you go through a crisis where the people who were reckless are the people we’re using our public funds to support, and we’re not building healthcare systems, we’re not building education systems. We’re using our fiscal capacity to subsidize gamblers, and the demoralization is fierce.
Steve Bannon once said, “if it hadn’t been for those bailouts in the Great Financial Crisis..,” his father was hurt by that. He was a linesman for, I believe, AT&T. Bannon said, “when his father lost his pension, all kinds of people became so despondent about the governance of America that it’s what led to the Tea Party, Occupy Wall Street, a Republican House, Republican Senat’:e, and his guy Donald Trump becoming the President of the United States.” A repeat performance like that right now would be even more dangerous, given the skepticism about expertise and elites that we all face. This is a very, very dangerous environment, which you might call an environment of skepticism about whether governance is working for the people or not. The authoritarian alternative is not an attractive one.
So if I understand this whole process correctly, if a Canadian bank is, say, trading dollars for yen with a Japanese bank, they actually have to go through the U.S. dollar before they complete the trade because of the U.S. dollar’s dominating role, and it’s the reserve currency. In the final analysis, all of this architecture, all roads lead through the U.S. financial system, so it’s really up to the U.S. regulatory authorities to deal with this. It seems like they’re not. Well, that’s the hub for all this. I assume Congress is really the one that is supposedly passing regulatory legislation, but they haven’t even taken on their own banks, never mind all this global financial activity in any serious regulatory way.
Well, I want to qualify it just a little bit. We have a parable that was once called the Treaty of Westphalia, which is about how a nation-state is structured and who’s responsible. We now have what we call globalization; what you might call the domain of the sovereign is much smaller than the scope of the marketplace in which people act. The dollar is used not just for the American economy; it’s used in transactions between, say, Korea and China or between Canada and Europe. You referred to an intermediate step because everybody goes into dollars and then out to the next thing. If they get through some surprise or shock called the place, they can retire, and their exposure is back into dollars. There’s not a big, what I’ll call a cross-currency market between the Canadian dollar and the Spanish peseta. But what are you going to do? You’re going to basically, maybe peseta into euro, euro into dollars, and dollars into Canadian dollars, because every one of those pairs has more liquidity and breadth of market depth than the straight across from the Spanish currency, which they largely use the euro now. I probably would have made a better example if I said something like the Brazilian currency would come through dollars or an Asian currency would come– how would I say?
There have been some initiatives. There’s a famous initiative called the Chiang Mai Initiative where the Chinese were reflecting a desire not to have everything triangle through the dollar. They could do things between the renminbi and the, say, Malaysian ringgit or Thai baht, and they would have an Asian system like there was an entry European system before the euro where the Deutschemark and French francs and all things worked in a coherent system. We’re in a place right now where in addition to it not just being America and America’s responsibility, there are dollar things going on between governments over which the American people and the American government have no authority. What we’ve tried to create in Bretton Woods, World Bank, IMF, and other things are what you might call multilateral institutions, which at least create cooperation and collaboration and minimize these dangers from what you might call reckless things that use the currency from a country that’s not really involved in the transaction. The scale of what you’re seeing is now huge.
So what should the regulations be, and who should be regulating this? Is it the Fed? Is it Congress? If it’s Congress, well, forget about it because Congress, especially this Congress coming, isn’t going to do much banking regulation.
What I would say is that leadership in the world financial system should probably be what you might call taken to the table of the G-20. When these fault lines, these potential dangerous– I’m not saying existing positions are dangerous. I’m saying when you have a systemic recognition, like the Bank for International Settlements, the BIS Report, they should take that to the head table of the G-20 and say, “how are we going to work this out? This doesn’t look healthy.” It looks like the remnants of playing nation-state games with welcome to wild and woolly offshore games from globalization, and we don’t have a coherent monetary system. If it does break down, the consequences will flow back into all these nations. There’s, how you say, a collective danger from playing in all these little pockets that have side effects that are not being what you might call put on the head table. That’s why I think the BIS warning is an excellent one. It’s saying this isn’t some little funny thing going on at a Las Vegas hotel. This is trillions of dollars in a world system with hedge funds, insurance companies, and pension funds are all involved. The wealth and the well-being of citizens in many parts of the world can be damaged severely if we don’t make this system coherent.
Well, given the tension now between the two biggest economies in the world, U.S. and China, what are the chances of that getting negotiated? Shouldn’t the U.S. just unilaterally regulate all this, given it’s the U.S. that manages global finance?
Well, I guess if the United States benefits from being a world reserve currency, in other words, the United States, for a long time, has been running big deficits and funding them with people holding U.S. dollar-denominated government bonds. That was what you might call one of the privileges associated with a U.S. bond; a government bond which is called a store of value, which will be properly managed, properly regulated, etc., in its home country. So if you’re sitting in Korea and you got extra money, where’s the place you can put the money where you know when you need it, you can get it back, and nobody’s going to have done craziness or monkey business with it.
So there is competition among the reserve currency countries for which you might call transparency, liquidity, and integrity of the system that makes holding that store of value much more attractive. Now we’re in a place where people can play with the American currency offshore, and the United States can’t stop them. On the other hand, they don’t necessarily want them to go be in the renminbi, Russian rubles, or whatever. I think the United States and Europe have had an amicable interaction where the euro, the dollar, and for that matter, the Japanese yen, have worked well in a trilateral system. I don’t think what will very shortly, if not already, be the largest economy in the world, which is China; they do not have a convertible exchange rate or enough experience with the supervision, regulation, and integrity of financial regulation to qualify as a reserve currency for international purposes.
Not yet, but aren’t we getting into a period where people don’t trust the United States to play that global management role? Everyone has acknowledged the U.S. benefits from it. Everybody acknowledges the U.S. benefits from being the reserve currency, but they go along with it because the U.S. does manage this system. In times of crisis, the Fed does put lots of liquidity into the system and not just to American banks. In ’07-’08, the Fed put money into European banks, even non-American corporations.
Well, I think there are concerns of that sort, and there’s also this kind of anxiety that– how would I say this? The United States is being induced to unlock and let the cash flow out of the central bank and build bubbles. Some of the pain that we’re going through right now is that in the time of the Ukraine war, the U.S.-China breakdown, and so forth, the momentum of good news was off. All of those induced the opening of the spigot by the United States to keep the system coherent on the up ramp going back to 2006, and now, which you might call the bear market in housing and stocks is creating pain.
You could say, “well, why didn’t the Federal Reserve– Governor [Colin] Powell and his team are acting very hawkish, and we’re going to keep raising rates.” A lot of people are saying, “well, the labor share of GDP is nothing like it was when Paul Volcker [Former Chair of the Federal Reserve of the United States] was putting the hammer down.” Yes, you have an oil shock from Ukraine like in the ’70s, you had an oil shock from OPEC, but you’re now crushing the people who’ve been struggling, which you might say the sophisticated billionaires got off the train and dumped the Nasdaq.
In other words, why don’t we have a more gentle growth of the economy corresponding to its growth of the stock market’s value as opposed to this whipsaw that goes up and down based on floods of liquidity and then, oh my god, inflation and trashing of it? We’re creating a system that has induced extreme volatility. When you have induced extreme volatility, sophisticated people who can pay lots of money to hire financiers can get out of harm’s way and watch everybody else get trashed. What we’ve seen with the tremendous intensification of the concentrations of wealth in the United States and around the world is that the strong get stronger by maybe even being short in the stock market while the broad population gets compressed and compressed or goes through the ups and downs of volatility. It’s creating a further sense of injustice, not a re-equilibration or balancing of society as it’s structured now.
Why would anyone trust the U.S. anymore and be willing to accept that deal? Yeah, you manage the system. We’ll help subsidize you, including subsidizing all your damn military expenditure, even your juicing of the American stock market. Let’s not forget, when it comes to volatility, it’s not that the rich just get out of the way of the consequences of most of that volatility. They know how to make even more riches out of volatility.
Yeah, I would say there are people who are professional in the realm of what I’ll call a two-way street in the markets, and they got to surf a big wave up from 2010 to essentially the end of the pandemic, but we’re now back in choppy water. Part of the reason that boom went up so big and for so long was that a U.S. central bank kept trying to calm the waters and kept having to open the spigot every time there was distress in a dollar-denominated world system. The shocks may emanate from other places in the world. There’s a problem in Iowa or Texas, and we’re dealing with that. There may be a problem in the Middle East, Russia, or Southeast Asia, and it leads to violent transactions in dollar-denominated things like swaps or what have you, and the central bank has to come in and calm the waters in the United States because it’s the reserve currency. Or what they do is they often give allocations to the other central banks to go administer their local regions, where they’re more knowledgeable about the specific firms immersed in the stress of the crisis. But nonetheless, the flood of dollars and then the drying up of dollars is related to the U.S. being at the center of that world system.
Given the scale of this off-the-books jeopardy and other forms of derivative plays, which are also even bigger than the global GDP, is there a growing lack of confidence in the system? We saw in ’07-’08 the big banks wouldn’t even loan to each other because they didn’t believe each other’s balance sheets because they knew how phony their balance sheet was. They assumed the other banks, and correctly assumed, their balance sheets were full of BS too. So is there enough capacity in the central banks to calm the waters? Does it get to a scale where there’s a meltdown of proportions we’ve never seen before?
I want to take it a little bit out of just the central bank because in securities markets, you have things like the Securities and Exchange Commission Gary Gensler runs, or the place he used to run, Commodities Futures Trading, CFTC. I talked about providing liquidity, but I also talked about the examination, setting standards for capital cushions, safety standards, and so forth. Some of the other regulatory apparatus plays a role there.
There’s a very brilliant scholar at the University of Maryland who I’ve done a lot of work with over the years, Michael Greenberger, and he was at the CFTC when Gary Gensler ran it. He engaged in proactive studies that really are worth looking at right now about the reporting of derivatives positions. There’s a very interesting story that underpins this. Let’s say London, Frankfurt, and New York are competing to be the world financial center’s hub. When they’re competing, they want more activity in their domain. By the way, people who invest in or own urban real estate in cities where high-powered finance takes place tend to benefit. So there’s a lot of collective social pressure to create an attractive environment for financiers so that your financial center attracts more activity, more people, and the rising tide raises all boats in your region.
Now, why am I bringing this up? Because when you force people to disclose all their derivatives and maybe take a haircut for a little safety cushion, you’re creating a disincentive. So there’s a competition in laxity between the different centers around the world, and Michael Greenberger has shown how the non-reporting of derivatives is not a coincidence or just an intellectual error. It’s part of a system of understanding that laxity may attract things that you want in your domain, perhaps to the detriment of the long-term integrity of the financial system. There needs to be, if you will, a level playing field on a global basis about the way derivatives are reported and how much cushion is set aside so that it’s not a place where you can gain an edge for your financial hub, say, New York relative to London, Frankfurt, Paris, Hong Kong, Tokyo, and Shanghai. Those incentives play a big role in what you might call refuting the desire for systemic integrity.
I know. I interviewed Greenberger a couple of times a few years ago. He was saying that the Commodity Future Trading Exchange, you know, they knew what needed to be done, and it wasn’t for lack of policy. They just couldn’t get enough people to staff the place, even in their own agency. Congress wasn’t funding them properly. You couldn’t get legislation passed that was actually effective regulation. It’s probably even worse now, which raises a fundamental systemic question. Is this model of capitalism even possible of creating a regulatory environment with some rationality? Because this concentration of economic power in the financial sector has given them such enormous political power. Who in Congress wants to take on the financial sector?
Right. To use Wall Street as a parable, but you could say London, or you could say Frankfurt; when you have a very high proportion of income and wealth, and there are many scholars who’ve now studied this in its relation to the distribution of income and wealth, the big donors can influence who gets appointed, what kind of laws and regulations are considered, how strong is the enforcement of existing laws and regulations. If you don’t like to have something enforced, you can start to tell congressmen and senators or the White House, using the United States as the example, we’re not going to hold fundraisers for you guys now, or maybe we’ll hold them for the other team that says we don’t need those things. They know how to stop strong enforcement of existing laws, they know how to stop new laws, they know how to repeal laws, and they know how to elect people or get people appointed who see things in a way that’s advantageous for their wallets.
There are people who run for office who aren’t beholden to Wall Street and actually do want some real financial regulation, but their own leadership, the leadership of the Democratic Party, doesn’t want these people to get elected and actively fights against them in primaries. But is that what we people need to do? Educate ourselves about some of these issues and then try to find candidates who are actually for some kind of action on this and organize and make this a demand in terms of developing and organizing a mass movement. The financial sector got a lot of attention in ’07-’08, but right now, they seem to just be getting off scot-free.
Yeah, I’m going to be a little bit fantasy-like for a moment. What we really need to do is collectively know that we have to reduce the role of money relative to the poles in our political system in order to take care of our population. What I mean by this is if you have public financing of elections, you could probably have smaller budget deficits because a lot of the stuff is [inaudible 00:39:21]. It’s done to induce campaign contributions. [inaudible 00:39:26] the population is going to put its tax money into public funding for elections, but you can’t [inaudible 00:39:37] donations. The [inaudible 00:39:38] might go down, and the deficit might be smaller, but the moment would be used. Secondly, you’ve got communication companies: radio, television, cable television, etc., they make a lot of money covering elections every two years in the United States. What if we said in order to get a charter, to be a communications company in America, you have to allocate public service announcements with time and not get paid for it by people who are selling [inaudible 00:40:00] for cheap? In other words, there is a public service where the candidates get to speak, but they don’t have to pay for it like it’s advertising.
There used to be legislation like that about equal opportunity in television during election campaigns, but I think it was Reagan who got rid of that.
I think, certainly, in the period from Richard Nixon on, it has disintegrated. I don’t follow the intimate history, but if you said to run for office, I don’t need to raise that much money; no one can raise that much money and use it, the public is paying for the budget, and it doesn’t cost so much to reach people and market it, then the value of voters goes up, and the value of money goes down.
Now, here’s the problem. How do you go to existing legislators and say you got to pass that because what they’re doing is, as incumbents, they’re preserving an advantage vis à vis challengers because they can sell policy and challengers can’t? So it might be a good idea, but I don’t know how that fantasy idea can be implemented. The idea of reducing the value of money might improve what you might call the vision of how to regulate a financial system or enforce antitrust or figure out how to work with these big communication monopolies that the digital age has spawned. There are all kinds of things where concentrated money shouldn’t be regulating itself. The systems are for the public as a whole, and if you allow money politics to play a big role, they won’t be designed or implemented for the broad well-being.
Thanks a lot, Rob.
Thank you.
Thanks, everybody, for joining us on theAnalysis.news.
Why does the apparently prescient and correct “key currency” view remain an embattled minority view?
In his June 1945 Congressional testimony in opposition to the new Bretton Woods institutions, John H. Williams outlined his own “key currency” view of the postwar international monetary system, which he explicitly tagged as quite definitely a “minority” view (1947, p. 266). Money is inherently hierarchical, not multilateral, and the central monetary problem for postwar reconstruction was to stabilize the dollar-sterling exchange rate as the core of a new global dollar system, which other currencies could join as they were able.
It’s the same view that Despres, Kindleberger, and Salant (DKS) would push two decades later in their famous “The Dollar and World Liquidity: a minority view” (1966). The postwar dollar system was coming under attack, by Robert Triffin urging an international currency on the one hand, and by Harry Johnson urging flexible exchange rates on the other (Mehrling 2022, Ch. 6 and 7), and DKS were stepping in to defend it. This time it was President Nixon who had other ideas (specifically his own reelection), unilaterally closing the gold window in August 1971, an act that Kindleberger always called the Crime of 1971. He feared worldwide deflation as had happened after 1931 but, contrary to his fear, this time global money and capital markets did not collapse, instead migrating offshore and giving rise to the Eurodollar system. And this time international monetary disorder took the form of worldwide inflation rather than deflation, a disorder that was eventually brought to heel by the 1979 Volcker shock and then consolidated by the 1985 Plaza Accord.
Today the international monetary system is very much a global dollar system more or less in line with the Williams/Kindleberger vision (McCauley 2021). This is so despite continuing opposition by policymakers (and economists) both inside and outside the US, and also notwithstanding periodic crises, most dramatically the Global Financial Crisis of 2008-9 and most recently the Covid crisis of March 2020. As in the past, today the standard economic view still treats individual countries as separate islands, each with its own currency. The Mundell-Fleming model formalizes that standard view, and provides the analytical frame for policy debate, even as the world outside the window increasingly diverges. And so the question arises, Why does the apparently prescient and correct “key currency” view remain an embattled minority view, visible almost nowhere except in the research output of the Bank for International Settlements (CGFS 2020)?
Deepening the puzzle, the key currency view is in fact not a minority view at all in practical banking circles. The reason is that practical bankers cannot avoid the world outside their window, lest it bites them, and so they tend to trust wisdom borne from experience more than formal models, perhaps we might say inductive rather than deductive knowledge. But such inductive knowledge relies on the available empirical data, and thus also on the conceptual frame used to organize (and even collect) that data, which is quite typically the standard model. As a consequence, the practical banker has rules of thumb and disparate pieces of wisdom, but typically no organized alternative theory, and certainly nothing with which to challenge entrenched academic orthodoxy. Confronted with the key currency approach, the practical banker dependably nods assent, recognizing a fellow traveler, but for day-to-day purposes typically relies instead on the less organized wisdom of experience.
This state of affairs, I suggest, is a problem, especially so today as we enter a period of monetary tightening after a decade of extreme looseness, which was the policy response to the GFC and then Covid. Governor Powell is explicitly analogizing the present moment to that which confronted Governor Volcker in 1979. Things are going to break (are in fact already breaking) and central banks are going to have to respond, but the mental frame that most people will be (are in fact) using is not well suited for understanding how the world now works, and the minority who do understand are in danger of being overwhelmed by sheer weight of numbers, not to mention entrenched authority. My new INET Working Paper raises the question as to why the key currency view is a minority view. The investigation is necessary spade work for any future project of remedy.
References
Committee on the Global Financial System. 2020. "US dollar funding: an international perspective." CGFS Paper No. 65 (June). https://www.bis.org/publ/cgfs6...
Despres, Emile, Charles P. Kindleberger and Walter Salant. 1966. "The Dollar and World Liquidity: a minority view." The Economist 218 No. 6389 (February 5).
McCauley, Robert. 2021. "The Global Domain of the Dollar: Eight Questions." Atlantic Economic Journal 48: 421-429. https://doi.org/10.1007/s11293...
Mehrling, Perry. 2022. Money and Empire, Charles P. Kindleberger and the Dollar System. Cambridge UK: Cambridge University Press.
Williams, John H. 1947. Postwar Monetary Plans and other essays. Third edition, revised and expanded. New York: Knopf.
Things are going to break and central banks are going to have to respond, but the mental frame that most people will be using is not well suited for understanding how the world now works
The advent of military Keynesianism is a warning against complacency about the moral superiority of the West in defending Ukrainian democracy.
The war in Ukraine features in our consciousness as resistance to invasion, with the West playing a leading part in supplying military hardware and imposing sanctions on Russia, consequently breaking down international free trade, regulating international payments, and boosting food and energy price inflation. But the war is also changing us with the emergence of a new role for the state in the countries supporting Ukraine’s resistance.
The outlines of this new role are clearly marked out in a recent report in the London Financial Times (‘War exposes “hard reality” of west’s capacity’ 3-4 December 2022, by John Paul Rathbone, Sylvia Pfeifer and Steff Chávez, with Felicia Schwarz). It records that the supply of military hardware to Ukraine is running down Western stocks of weapons, with little prospect of any immediate replacement. The United States in particular has dispatched around a third of its stock of Javelin anti-tank missiles to Ukraine, and a similar proportion of its Stinger anti-aircraft missiles.
The situation in Europe is worse. The United Kingdom has been delivering next-generation light anti-tank weapons (NLAWs) to Ukraine at the expense of supplies committed to other buyers. France has supplied six Caesar self-propelled howitzers to Ukraine, that were due to be delivered to Denmark.
The supply constraint on Western arms production arises because the end of the Cold War, at the start of the 1990s, gave rise to a ‘peace dividend’ of reduced armaments expenditure that slimmed down weapons production to ‘just-in-time’ lean production, with reduced inventories of armaments, and especially of the heavy weaponry that has been of limited use in the anti-terror wars that the West has been involved in since the end of the Cold War.
Following the Russian invasion of Ukraine, Western governments are committed to increased defense expenditure. But their armaments industries, under conditions of peace-time economic efficiency, do not have the spare capacity to ramp up production. Many are already operating shifts around the clock to satisfy orders comings in. To increase production they need to invest in new capacity. However, this is only worthwhile if armaments companies can be assured of contracts into the future expected lifetime of any new productive equipment. Industrialists with interests in arms supplies are now complaining about the time it takes to get contracts signed. An additional worry for them is the prospect of peace breaking out, which may leave armaments manufacturers with costly, but unused productive capacity that may have to be scrapped with the next technological innovation. (Much the same dilemma is faced by oil and natural gas producers who are being urged to expand production to replace sanctioned Russian supplies).
In short, weapons producers want governments to underwrite the profitability of their investments. This is precisely the alliance between industry and the state that formed the basis of the military Keynesianism that Michal Kalecki criticized during the 1950s. He showed how, at the height of the Cold War, Western governments subsidized private capital with arms contracts paid for by taxpayers. This arrangement lay at the heart of what has come to be described, somewhat misleadingly, as a ‘golden age’ by heterodox economists, who lament its replacement by "neoliberalism." The real danger is not neo-liberalism but the takeover of the state by industrial interests which cannot be denied because of the external and internal threats to democracy.
The advent of military Keynesianism is a warning against complacency about the moral superiority of the West in defending Ukrainian democracy. The resurgence of what President Eisenhower once called the military-industrial complex brings our industrial magnates closer to centers of power. In this respect, our oligarchs are no better than Russian oligarchs, even if we defend existing democracy because it offers more scope for progressive politics than autocratic nationalism.
Military Keynesianism challenges democrats about the limits of the democracy that is being fought over in Ukraine. Is the future of that democracy assured by a state which underwrites industrial profits? Or does that future also require the extension of civil rights and welfare to all classes? If the struggle for democracy is just to save Ukraine for democracy, or to extend democracy in the Russian or Chinese spheres of influence, then that struggle will take the West down the path to the oligarchic capitalism of Russia.
A Bank for International Settlements study says 60+ trillion dollars of off-the-books currency swaps could be a profound, systematic risk. Robert Johnson joins Paul Jay on theAnalysis.news.
Hi, I’m Paul Jay. Welcome to theAnalysis.news. In a few seconds, I’ll be back with Rob Johnson to talk about a ticking time bomb in the global financial system. Be back in just a few seconds. Please don’t forget the donate button at the top of the website, and subscribe on YouTube. Most importantly, come to the website and get on our email list, and I’ll be back, as I said.
I hate to be the bearer of more bad news, but there’s a story that appeared in the Business Press but received almost no attention in mass media. I think capitalism is in chaos and is out of solutions. If the climate crisis wasn’t enough to convince you, here’s another example.
Bloomberg reports, “there’s a hidden risk deep inside the global financial system, embedded within $65 trillion of “dollar debt” held by non-U.S. institutions via currency derivatives, according to the Bank of International Settlements.” Okay, if you don’t know what all that means, we’re going to get into that soon. Just know all this could affect our lives in dire ways.
Now, back to Bloomberg. “Banks headquartered outside the U.S. carry $39 trillion of this debt— more than double their on-balance sheet obligations and ten times their capital. Shadow banks— otherwise known as non-bank financial intermediaries— have increased their dollar swap and forward liabilities to $26 trillion, which is twice the size of their on-balance-sheet debts.”
I’m going to take a crack at interpreting this. Dollar swaps are when– say, a non-U.S. pension fund, corporation, or bank needs to do a transaction in U.S. dollars but holds Euros; they agree to do a currency swap with a partner who holds U.S. dollars and wants Euros. These can be of enormous size– hundreds of millions of dollars, sometimes swapping overnight or in just a matter of a few days, but it can also be longer. Sounds reasonable. But wait a minute. Now we’re going back to Bloomberg again.
“Non-US banks have almost $40 trillion of hidden dollar liabilities from FX swaps and forwards, nearly three-times their recorded dollar debt. Accounting conventions only require derivatives to be booked on a net basis, so the full extent of the cash involved isn’t recorded on a balance sheet. This is what’s keeping the BIS up at night.”
Reuters reports, “the $80 trillion-plus hidden debt…” that’s even more than Bloomberg said, “… $80 trillion-plus [“hidden”] debt estimate exceeds the stocks of dollar Treasury bills, repo and commercial paper combined, the BIS said.” Again, what does all this financial gobbledygook mean? Well, in short, there could be a ticking time bomb in the global financial system that could trigger a crash, something similar to 2007 and 2008. That means millions of people around the world are falling further into despair, losing homes and losing jobs– a devastating effect for all of us ordinary folk who have little to no knowledge of what’s going on in the financial sector.
Now, joining us to make sense of all this is Rob Johnson. Rob is the President of the Institute for New Economic Thinking [INET]. In his multi-faceted life and career, he was, at one point, Chief Economist of the Senate Banking Committee at the time of the ’87 stock market crash in the savings and loan crisis. He is also known as the man who helped George Soros [Hungarian-American businessman and philanthropist] and Stanley Druckenmiller [American investor] break the bank of England; that’s a whole other story– you can look it up. He now fights for the regulation of the financial system, as Rob says,” in ways to have the financial sector generate economic growth, balance and limit predatory value extraction,” which ain’t happening much now. Alright, thanks for joining me, Rob.
Yes, it’s my pleasure. This is, how would I say, an important and treacherous domain that you want to explore.
So, Rob, all this stuff is so complex that people not involved, and I suspect a lot of this complexity is deliberate, so people not involved don’t understand it. If it wasn’t for a few articles in the Financial Press, nobody would even know of this BIS report. How dangerous is this warning?
Well, a number of things come to mind. First of all, I want to encourage people to get better acquainted with the Bank for International Settlements. The various people there, Bob McCauley, Hyun Shin, and others, are at a multilateral institution in a time of globalization, and they are studying the fault lines and flaws in the system. Whether it be in the old days, how the Asian companies all borrowed dollars and then brought the money into renminbis so they could have a U.S.-China crisis, as they had in 2015, or what we might call swaps and forwards mismatch, they’re talking about now. They look for the vulnerable, the weak links, or the fault lines in the system.
How dangerous is this warning?
Well, I think the scale that we’re talking about, the $39 trillion, etc. tells you that if something slips, like if you step on the banana peel– what they talk about in their report is the central banks will then all have to come in and open the spigots. In other words, if there’s a dollar shortage and it creates a frenzy, they’re going to have to supply the dollars to put out the fire. What that comes down to is what I have referred to in the work I’ve done on finance as the ‘mother of all moral hazards’. If you know the central bank can see the big institutions creating something that’s dangerous for the whole world, the central bank has no choice– what we might call an organ of public policy– but to try to put out the fire. But if you know they’ll put out the fire, you may take more risk knowing you’re going to get underpinned. What we need is a system where they’re there to rescue, but they also have the capacity to evaluate these institutions, have proper reporting of their positions, and which you might call impose prior restraint.
Okay, just for a second before we get further into this, just so people understand the dynamic here– if a Japanese company wants, I don’t know, Canadian dollars, say, some other company, bank, financial institution, or pension fund has Canadian dollars but wants yen, and they can do a swap. Eventually, they will resolve this swap, and this money doesn’t go on the balance sheet until the whole transaction is completed. At any rate, it all sounds relatively benign. Why is it dangerous?
Well, if you’re saying all of these institutions are fine in terms of their balance sheet, integrity, and so forth, and they’ve made a deal to go from dollars into yen, and 30 days from now, come back out, the difference between the price today and the price 30 days from now depends upon the interest you’d earn– what they call interest rate arbitrage.
Let’s say the U.S. has a 3% interest rate and another country, say Italy, has a 6% interest rate, so if you borrow dollars and then invest in Italian lira, you’re going to borrow at 3% and earn at 6%. Then when you close it out, there is an anticipation in what’s called covered interest parity– these are technical terms. If the Italian lira is going to pay you 3%, let’s just say over a year, if they’re going to pay you 3% over a year more than what you borrow for dollars, the exchange rate is going to depreciate by 3%, meaning the dollar lira currency rate, and so that the net, it’s an even deal. You can either be in dollars and earn 3%, or you can be in lira and earn 6% with a 3% depreciation. If that’s all a closed system, and there’s no solvency risk on either side, and everybody honors the contract, then it’s fine.
Now we move to some of the peculiarities. For instance, not every country and not every country’s borrowers are as high integrity as others. So a country like Germany or a country like the United States or Switzerland might have a more solid financial system than some of emerging Asia, Latin America, or other places. When you engage in these contracts, if the borrowers who are borrowing dollars and are supposed to repay start to have a fear of default risk over that one-year horizon that I used hypothetically, it could be three months or one month, then they may not come back and repay and retire the debt. In other words, the hole that’s created by the fear of bankruptcy or insolvency of institutions is what you might call a void that must be filled to protect the quality of credit. If these are small numbers and short-term things, they don’t tend to be as dangerous. If everybody is considered properly monitored and regulated, and all of the financial institutions that are engaged have enough capital set aside, which you might call a safety buffer, then everything can balance out. If it’s all done on a small scale, it doesn’t have systemic effects. But when you have tens of trillions of dollars spread across a world system that has very different qualities of regulation and integrity of financial institutions, the BIS is warning us that if something collapses in one place or another, the ability to honor the roundtrip contract will be suspect, which will lead to speculation on it blowing up, which will exacerbate the blow-up. In other words, some smart people will see, say, on a Ukraine crisis where a country that’s very dependent upon oil, their balance of payments will deteriorate, and then can they finance things, etc. In other words, financial speculators are smart, and when there’s a fault line, if it’s getting bigger, they put more pressure on it.
So it can become, like, in the midst of a moment of crisis that might even be triggered by something else, like what happened in ’07 and ’08, subprime or something like the fall of Lehman Brothers, one crisis can trigger the other. This gets triggered, and because it’s on such an enormous scale, there’s no way to evaluate just how risky it is because we actually don’t have a handle on how much off the books there is.
I think one document, maybe it was the BIS report, said the amount of outstanding off-the-book debt and the debt on the books; if you combine it all, it is like equal to the whole global GDP. The numbers are staggering.
Yeah, let me take you back in history a little bit. Enron appeared to be a very successful corporation, and they created things off the balance sheet called special purpose vehicles. They did a lot of their transactions there, in what you might call hid their losses there, so their holding company looked like it was very profitable, and their stock looked like a good investment. But when those off-balance sheets, special purpose vehicles, were revealed, then the whole picture changed, suddenly.
In the 2008-2010 crisis, what they call the Great Financial Crisis, many of the big bank holding companies had lots of special purpose vehicles, which had big holdings of derivatives in other countries and other places that were not disclosed to the regulators. So let’s talk about it. If you allow structures where people can hide their position, you’re creating the potential for danger. If you don’t allow regulators to impose what I’ll call capital requirements on each position you take, then the system is more fragile and more risky. The first thing you need is proper disclosure of what positions you have. The second thing you need is an understanding that the regulatory authorities can put that safety cushion requirement on you while you go out and play in the private markets.
What the BIS is alluding to here is we’ve got undisclosed and hidden positions, potentially on a very high scale, and we have not got uniform global regulations. This is what I will call the examination, the scrutiny, the enforcement, and the requirements of capital are not uniform. Then obviously, the world can have events that economists refer to as shocking the system, which suddenly changes the perspective. Then people go into a bit of a frightened frenzy because if they don’t know what positions their counterparties really have, they get scared, become more cautious, everybody runs to safety, and it widens these fault lines and leads to what you might call the propagation of fear and the propagation of damage. That’s what draws the central banks and finance ministries in to bail out these guys, and like the 2008 crisis in the United States, as Joe Stiglitz once famously said, “the polluters got paid.” Then you go through a crisis where the people who were reckless are the people we’re using our public funds to support, and we’re not building healthcare systems, we’re not building education systems. We’re using our fiscal capacity to subsidize gamblers, and the demoralization is fierce.
Steve Bannon once said, “if it hadn’t been for those bailouts in the Great Financial Crisis..,” his father was hurt by that. He was a linesman for, I believe, AT&T. Bannon said, “when his father lost his pension, all kinds of people became so despondent about the governance of America that it’s what led to the Tea Party, Occupy Wall Street, a Republican House, Republican Senat’:e, and his guy Donald Trump becoming the President of the United States.” A repeat performance like that right now would be even more dangerous, given the skepticism about expertise and elites that we all face. This is a very, very dangerous environment, which you might call an environment of skepticism about whether governance is working for the people or not. The authoritarian alternative is not an attractive one.
So if I understand this whole process correctly, if a Canadian bank is, say, trading dollars for yen with a Japanese bank, they actually have to go through the U.S. dollar before they complete the trade because of the U.S. dollar’s dominating role, and it’s the reserve currency. In the final analysis, all of this architecture, all roads lead through the U.S. financial system, so it’s really up to the U.S. regulatory authorities to deal with this. It seems like they’re not. Well, that’s the hub for all this. I assume Congress is really the one that is supposedly passing regulatory legislation, but they haven’t even taken on their own banks, never mind all this global financial activity in any serious regulatory way.
Well, I want to qualify it just a little bit. We have a parable that was once called the Treaty of Westphalia, which is about how a nation-state is structured and who’s responsible. We now have what we call globalization; what you might call the domain of the sovereign is much smaller than the scope of the marketplace in which people act. The dollar is used not just for the American economy; it’s used in transactions between, say, Korea and China or between Canada and Europe. You referred to an intermediate step because everybody goes into dollars and then out to the next thing. If they get through some surprise or shock called the place, they can retire, and their exposure is back into dollars. There’s not a big, what I’ll call a cross-currency market between the Canadian dollar and the Spanish peseta. But what are you going to do? You’re going to basically, maybe peseta into euro, euro into dollars, and dollars into Canadian dollars, because every one of those pairs has more liquidity and breadth of market depth than the straight across from the Spanish currency, which they largely use the euro now. I probably would have made a better example if I said something like the Brazilian currency would come through dollars or an Asian currency would come– how would I say?
There have been some initiatives. There’s a famous initiative called the Chiang Mai Initiative where the Chinese were reflecting a desire not to have everything triangle through the dollar. They could do things between the renminbi and the, say, Malaysian ringgit or Thai baht, and they would have an Asian system like there was an entry European system before the euro where the Deutschemark and French francs and all things worked in a coherent system. We’re in a place right now where in addition to it not just being America and America’s responsibility, there are dollar things going on between governments over which the American people and the American government have no authority. What we’ve tried to create in Bretton Woods, World Bank, IMF, and other things are what you might call multilateral institutions, which at least create cooperation and collaboration and minimize these dangers from what you might call reckless things that use the currency from a country that’s not really involved in the transaction. The scale of what you’re seeing is now huge.
So what should the regulations be, and who should be regulating this? Is it the Fed? Is it Congress? If it’s Congress, well, forget about it because Congress, especially this Congress coming, isn’t going to do much banking regulation.
What I would say is that leadership in the world financial system should probably be what you might call taken to the table of the G-20. When these fault lines, these potential dangerous– I’m not saying existing positions are dangerous. I’m saying when you have a systemic recognition, like the Bank for International Settlements, the BIS Report, they should take that to the head table of the G-20 and say, “how are we going to work this out? This doesn’t look healthy.” It looks like the remnants of playing nation-state games with welcome to wild and woolly offshore games from globalization, and we don’t have a coherent monetary system. If it does break down, the consequences will flow back into all these nations. There’s, how you say, a collective danger from playing in all these little pockets that have side effects that are not being what you might call put on the head table. That’s why I think the BIS warning is an excellent one. It’s saying this isn’t some little funny thing going on at a Las Vegas hotel. This is trillions of dollars in a world system with hedge funds, insurance companies, and pension funds are all involved. The wealth and the well-being of citizens in many parts of the world can be damaged severely if we don’t make this system coherent.
Well, given the tension now between the two biggest economies in the world, U.S. and China, what are the chances of that getting negotiated? Shouldn’t the U.S. just unilaterally regulate all this, given it’s the U.S. that manages global finance?
Well, I guess if the United States benefits from being a world reserve currency, in other words, the United States, for a long time, has been running big deficits and funding them with people holding U.S. dollar-denominated government bonds. That was what you might call one of the privileges associated with a U.S. bond; a government bond which is called a store of value, which will be properly managed, properly regulated, etc., in its home country. So if you’re sitting in Korea and you got extra money, where’s the place you can put the money where you know when you need it, you can get it back, and nobody’s going to have done craziness or monkey business with it.
So there is competition among the reserve currency countries for which you might call transparency, liquidity, and integrity of the system that makes holding that store of value much more attractive. Now we’re in a place where people can play with the American currency offshore, and the United States can’t stop them. On the other hand, they don’t necessarily want them to go be in the renminbi, Russian rubles, or whatever. I think the United States and Europe have had an amicable interaction where the euro, the dollar, and for that matter, the Japanese yen, have worked well in a trilateral system. I don’t think what will very shortly, if not already, be the largest economy in the world, which is China; they do not have a convertible exchange rate or enough experience with the supervision, regulation, and integrity of financial regulation to qualify as a reserve currency for international purposes.
Not yet, but aren’t we getting into a period where people don’t trust the United States to play that global management role? Everyone has acknowledged the U.S. benefits from it. Everybody acknowledges the U.S. benefits from being the reserve currency, but they go along with it because the U.S. does manage this system. In times of crisis, the Fed does put lots of liquidity into the system and not just to American banks. In ’07-’08, the Fed put money into European banks, even non-American corporations.
Well, I think there are concerns of that sort, and there’s also this kind of anxiety that– how would I say this? The United States is being induced to unlock and let the cash flow out of the central bank and build bubbles. Some of the pain that we’re going through right now is that in the time of the Ukraine war, the U.S.-China breakdown, and so forth, the momentum of good news was off. All of those induced the opening of the spigot by the United States to keep the system coherent on the up ramp going back to 2006, and now, which you might call the bear market in housing and stocks is creating pain.
You could say, “well, why didn’t the Federal Reserve– Governor [Colin] Powell and his team are acting very hawkish, and we’re going to keep raising rates.” A lot of people are saying, “well, the labor share of GDP is nothing like it was when Paul Volcker [Former Chair of the Federal Reserve of the United States] was putting the hammer down.” Yes, you have an oil shock from Ukraine like in the ’70s, you had an oil shock from OPEC, but you’re now crushing the people who’ve been struggling, which you might say the sophisticated billionaires got off the train and dumped the Nasdaq.
In other words, why don’t we have a more gentle growth of the economy corresponding to its growth of the stock market’s value as opposed to this whipsaw that goes up and down based on floods of liquidity and then, oh my god, inflation and trashing of it? We’re creating a system that has induced extreme volatility. When you have induced extreme volatility, sophisticated people who can pay lots of money to hire financiers can get out of harm’s way and watch everybody else get trashed. What we’ve seen with the tremendous intensification of the concentrations of wealth in the United States and around the world is that the strong get stronger by maybe even being short in the stock market while the broad population gets compressed and compressed or goes through the ups and downs of volatility. It’s creating a further sense of injustice, not a re-equilibration or balancing of society as it’s structured now.
Why would anyone trust the U.S. anymore and be willing to accept that deal? Yeah, you manage the system. We’ll help subsidize you, including subsidizing all your damn military expenditure, even your juicing of the American stock market. Let’s not forget, when it comes to volatility, it’s not that the rich just get out of the way of the consequences of most of that volatility. They know how to make even more riches out of volatility.
Yeah, I would say there are people who are professional in the realm of what I’ll call a two-way street in the markets, and they got to surf a big wave up from 2010 to essentially the end of the pandemic, but we’re now back in choppy water. Part of the reason that boom went up so big and for so long was that a U.S. central bank kept trying to calm the waters and kept having to open the spigot every time there was distress in a dollar-denominated world system. The shocks may emanate from other places in the world. There’s a problem in Iowa or Texas, and we’re dealing with that. There may be a problem in the Middle East, Russia, or Southeast Asia, and it leads to violent transactions in dollar-denominated things like swaps or what have you, and the central bank has to come in and calm the waters in the United States because it’s the reserve currency. Or what they do is they often give allocations to the other central banks to go administer their local regions, where they’re more knowledgeable about the specific firms immersed in the stress of the crisis. But nonetheless, the flood of dollars and then the drying up of dollars is related to the U.S. being at the center of that world system.
Given the scale of this off-the-books jeopardy and other forms of derivative plays, which are also even bigger than the global GDP, is there a growing lack of confidence in the system? We saw in ’07-’08 the big banks wouldn’t even loan to each other because they didn’t believe each other’s balance sheets because they knew how phony their balance sheet was. They assumed the other banks, and correctly assumed, their balance sheets were full of BS too. So is there enough capacity in the central banks to calm the waters? Does it get to a scale where there’s a meltdown of proportions we’ve never seen before?
I want to take it a little bit out of just the central bank because in securities markets, you have things like the Securities and Exchange Commission Gary Gensler runs, or the place he used to run, Commodities Futures Trading, CFTC. I talked about providing liquidity, but I also talked about the examination, setting standards for capital cushions, safety standards, and so forth. Some of the other regulatory apparatus plays a role there.
There’s a very brilliant scholar at the University of Maryland who I’ve done a lot of work with over the years, Michael Greenberger, and he was at the CFTC when Gary Gensler ran it. He engaged in proactive studies that really are worth looking at right now about the reporting of derivatives positions. There’s a very interesting story that underpins this. Let’s say London, Frankfurt, and New York are competing to be the world financial center’s hub. When they’re competing, they want more activity in their domain. By the way, people who invest in or own urban real estate in cities where high-powered finance takes place tend to benefit. So there’s a lot of collective social pressure to create an attractive environment for financiers so that your financial center attracts more activity, more people, and the rising tide raises all boats in your region.
Now, why am I bringing this up? Because when you force people to disclose all their derivatives and maybe take a haircut for a little safety cushion, you’re creating a disincentive. So there’s a competition in laxity between the different centers around the world, and Michael Greenberger has shown how the non-reporting of derivatives is not a coincidence or just an intellectual error. It’s part of a system of understanding that laxity may attract things that you want in your domain, perhaps to the detriment of the long-term integrity of the financial system. There needs to be, if you will, a level playing field on a global basis about the way derivatives are reported and how much cushion is set aside so that it’s not a place where you can gain an edge for your financial hub, say, New York relative to London, Frankfurt, Paris, Hong Kong, Tokyo, and Shanghai. Those incentives play a big role in what you might call refuting the desire for systemic integrity.
I know. I interviewed Greenberger a couple of times a few years ago. He was saying that the Commodity Future Trading Exchange, you know, they knew what needed to be done, and it wasn’t for lack of policy. They just couldn’t get enough people to staff the place, even in their own agency. Congress wasn’t funding them properly. You couldn’t get legislation passed that was actually effective regulation. It’s probably even worse now, which raises a fundamental systemic question. Is this model of capitalism even possible of creating a regulatory environment with some rationality? Because this concentration of economic power in the financial sector has given them such enormous political power. Who in Congress wants to take on the financial sector?
Right. To use Wall Street as a parable, but you could say London, or you could say Frankfurt; when you have a very high proportion of income and wealth, and there are many scholars who’ve now studied this in its relation to the distribution of income and wealth, the big donors can influence who gets appointed, what kind of laws and regulations are considered, how strong is the enforcement of existing laws and regulations. If you don’t like to have something enforced, you can start to tell congressmen and senators or the White House, using the United States as the example, we’re not going to hold fundraisers for you guys now, or maybe we’ll hold them for the other team that says we don’t need those things. They know how to stop strong enforcement of existing laws, they know how to stop new laws, they know how to repeal laws, and they know how to elect people or get people appointed who see things in a way that’s advantageous for their wallets.
There are people who run for office who aren’t beholden to Wall Street and actually do want some real financial regulation, but their own leadership, the leadership of the Democratic Party, doesn’t want these people to get elected and actively fights against them in primaries. But is that what we people need to do? Educate ourselves about some of these issues and then try to find candidates who are actually for some kind of action on this and organize and make this a demand in terms of developing and organizing a mass movement. The financial sector got a lot of attention in ’07-’08, but right now, they seem to just be getting off scot-free.
Yeah, I’m going to be a little bit fantasy-like for a moment. What we really need to do is collectively know that we have to reduce the role of money relative to the poles in our political system in order to take care of our population. What I mean by this is if you have public financing of elections, you could probably have smaller budget deficits because a lot of the stuff is [inaudible 00:39:21]. It’s done to induce campaign contributions. [inaudible 00:39:26] the population is going to put its tax money into public funding for elections, but you can’t [inaudible 00:39:37] donations. The [inaudible 00:39:38] might go down, and the deficit might be smaller, but the moment would be used. Secondly, you’ve got communication companies: radio, television, cable television, etc., they make a lot of money covering elections every two years in the United States. What if we said in order to get a charter, to be a communications company in America, you have to allocate public service announcements with time and not get paid for it by people who are selling [inaudible 00:40:00] for cheap? In other words, there is a public service where the candidates get to speak, but they don’t have to pay for it like it’s advertising.
There used to be legislation like that about equal opportunity in television during election campaigns, but I think it was Reagan who got rid of that.
I think, certainly, in the period from Richard Nixon on, it has disintegrated. I don’t follow the intimate history, but if you said to run for office, I don’t need to raise that much money; no one can raise that much money and use it, the public is paying for the budget, and it doesn’t cost so much to reach people and market it, then the value of voters goes up, and the value of money goes down.
Now, here’s the problem. How do you go to existing legislators and say you got to pass that because what they’re doing is, as incumbents, they’re preserving an advantage vis à vis challengers because they can sell policy and challengers can’t? So it might be a good idea, but I don’t know how that fantasy idea can be implemented. The idea of reducing the value of money might improve what you might call the vision of how to regulate a financial system or enforce antitrust or figure out how to work with these big communication monopolies that the digital age has spawned. There are all kinds of things where concentrated money shouldn’t be regulating itself. The systems are for the public as a whole, and if you allow money politics to play a big role, they won’t be designed or implemented for the broad well-being.
Thanks a lot, Rob.
Thank you.
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