[OPE] K.G. Zinn, The Legal Criminality of Finance Capitalism

From: glevy@pratt.edu
Date: Thu Mar 27 2008 - 09:00:01 EDT


By Karl Georg Zinn

[This article published in: Sozialismus Nr. 3, March 2008 is
translated from the German on the World Wide Web,

Of the multitude
of objectively fraudulent financial transactions, very few ware clearly
described even though irresponsible dealing with foreign money was long
manifest. The minimizing adjectives
‚€œspeculative‚€Ě and
‚€œdubious‚€Ě are products of legal

A reproach of fraud, naming the cause by its true
name, can have awkward consequences nowadays for those who levy it,
especially when political decision-makers and persons with great capital
are involved in the ‚€œdubious‚€Ě financial
transactions. Because of the abundance of these cases, an overly clear
language would be very detrimental for the belief in market control and
the self-healing powers of the market. This belief was shaky anyway. 

The escalation of ‚€œdubious‚€Ě
financial practices has a long history and mirrors the history of the
‚€œpolicy of globalization‚€Ě that goes back
to the 1970s. Dismantling financial market- and capital transactions
controls began at that time. These controls were introduced in the 1970s
as a reaction to the 1929 breakdown of stock market speculations. The
lessons from history were cast to the wind again in the 1970s. 

The accompanying ideological music for the economic
‚€œinnovations‚€Ě that cast capitalism in
western industrial countries back to the pre-Keynesian level was played
for the triumphant advance of the neoliberal market religion. The direct
profiteers who boasted of ‚€œinnovative financial
products‚€Ě and political and official opinion-makers had
shining eyes when they praised the
‚€œefficient‚€Ě market that brings capital to
the most diligent investor and the most profitable investment. 


In English-speaking countries, there is a kind of generic term
‚€“ ‚€œPonzi scheme‚€Ě
‚€“ for ‚€œdubious‚€Ě or
‚€œspeculative‚€Ě financial transactions that
is not shy of referring to criminal, fraudulent transactions and/or
transactions by embezzlements. The name
‚€œPonzi‚€Ě has also recently turned up in the
German media. The little-noticed US economist Hyman Minsky (1916-1996)
predicted the (near-) inevitability of a financial crash decades ago. 

The term ‚€œPonzi scheme‚€Ě associates
fraudulent money transactions with the name of the criminal Charles Ponzi
(1862-1949) who according to the Wikipedia Internet encyclopedia was
‚€œone of the greatest swindlers and deceivers of
American history.‚€Ě To quote Wikipedia, he was publically
extolled ‚€œas a hero‚€Ě with his deportation
from the US to Italy in 1934. Among Italians ‚€“ whether
in the US or Italy ‚€“ his veneration had a mythical
dimension. ‚€œFor forging a check in the amount of $423
with which he began his criminal career in 1907, he was imprisoned for
three years. After his release, he discovered chances of becoming rich
with snowball- and pyramid-schemes. 

The amount juggled by
Ponzi was respectable but didn‚€™t go beyond three-digit
millions and was far from the billions common today. Thus a small- or
medium-sized fish is compared with a shark. But like the shark, Ponzi had
only temporary success. He died totally impoverished in a hospital in Rio
de Janeiro. His persuasiveness was coupled with criminal energy and the
greed of financial backers enticed in masses by promises of astronomical

In the meantime the Ponzi scheme has had an honored
career. The US economist Hyman Minsky regarded as a Keynesian in the broad
sense saw the self-dynamic in the mechanism of financial market
transactions that flows inevitably in the (quasi-) criminal. [1] Minsky
introduced the term ‚€œPonzi finance‚€Ě for
that end phase of expansive irresponsible financial market intrigues. The
thematic starting point for Minsky‚€™s reflections was
the counter-position to the classical-neoclassical belief in
‚€œefficient balanced markets‚€Ě urged by

The market mechanism is not efficient or balanced,
Keynesians say. Rather markets can only continuously produce imbalances
and inefficient results because of the existing insecurity (in contrast to
the theoretical probability risk). Keynes was not the first to discover
the difference between calculable risk/uncertainty on one side and the
purely subjective insecurity dependent on individual personality
characteristics (animal spirits) on the other side. Frank H. Knight has
the honor of clearly distinguishing insurable risks defined mathematically
from non-insurable insecurity. However Keynes first gave insecurity the
rank of an aggregate economic reality that like a tornado repeatedly
devastates the theoretical landscape of the balance-gardener. Minsky
grounded his ‚€œfinancial instability
hypothesis‚€Ě [2] on this Keynesian view of reality. 

There is a controversy whether Hyman Minsky presents a theory or only
concludes from generalized economic experiences that repeated
mis-developments will occur in the future. Minsky distinguished three
stages in the development of expansive credit financing: 

Security financing (hedge finance) which had nothing to do with the
hedge-funds causing havoc today. Credits are used to the full extent so
that debtors can pay interests and repayment charges as stipulated. 
(2) Speculative financing (speculative finance): the debtors pay
interest on time but the revenues are not enough for the repayment so new
credits are taken again and again for the repayment. This
‚€œroll over‚€Ě is used by creditors (banks
and other financial institutions) when they have problems in profitably
lending liquid funds for capital investments as was increasingly the case
in the last three decades. 
(3) Ponzi-financing (Ponzi finance):
Debtors accept more and more credits to meet their interest obligations.
This is only possible for a certain time before (mass) bankruptcy
declarations occur and the credit chains subsequently break. 


Minsky saw a change in the relation of creditor and debtor in the
long-term development of capitalism (since the beginning of the 19th
century) ‚€“ following Schumpeter‚€™s
understanding of history ‚€“ and synchronously a chance
for the finance capitalist sector in relation to producing non-financial
businesses. The following evolutionary phases can be distinguished: 

1. Commercial capitalism: Credits serve mainly to finance
industrial development or rebuild and flow into capital formation. Profits
are based chiefly on value creation, the production of goods. Profits
correspond to a growing steam of goods and services. 

Financial capitalism: Speculative intrigues and stock transactions appear
in the foreground over against the search for profits based on production
or real value creation so that the stock market crash shakes the whole
economy (as in the Great Depression after 1929). 

3. Manager
capitalism: More independence from the financial sector comes to managers
of non-financial businesses because of the state‚€™s
(anti-cyclical) stabilization policy and central bank liquidity assurance.
Amid the threatening collapse of the financial system (as during the New
Deal of US president F. D. Roosevelt and in the relatively stable
regeneration phase after the Second World War). 

4. Money
manager capitalism: Owing to the rapid growth of institutional investors
like pension funds, insurances, investment funds and the like,
‚€œmosquitoes‚€Ě of every kind, businesses of
the non-financial realm are dethroned and their business policy adjusted
to the ideas of institutional investors. Traditional
‚€œsmall shareholders‚€Ě were also actually
deprived of power. Their ‚€œgrievances‚€Ě are
hardly taken seriously in decision-making. Rating-agencies issuing
(mostly) good and (rarer) bad grades for public and private borrowers,
banks and other financial market actors are a relatively new phenomenon.
That those who are issued censures pay the auditors is more than a
beauty-mark. Rating-agencies are financed by businesses whose
creditworthiness they evaluate and who obviously depend on good grades.
They want the money of potential investors. These are not all rich people
though they are not the totally poor. Thus the conflict of interest
between auditors and social climbers is built into the rating system. 


Hyman Minsky died twelve years ago. He may have suspected the
most recent developments on the finance markets. Since the beginning of
the new millennium, completely new actors have become influential players
in the international financial business ‚€“ state
investment funds or sovereign wealth funds of oil-exporting states and
up-and-coming Asian actors. This type of finance market agency is not
completely new. For a long time, Norway has had this kind of fund. However
the Norwegian state fund is different from the newcomers in two regards.
Firstly, Norway is a democratic country which is also reflected in the
investment policy of its fund. The fund allows a maximum 5% participation
of businesses and requires the observance of certain moral standards by
these businesses. For example, the participation of Wal-Mart was refused
in November 2005 because this retail chain discriminated against union
organization of its employees and deplorably used child labor. Unlike
private funds, state funds of democratic countries face stronger public
scrutiny. As a rule, the state as owner does not tolerate or stops morally
reprehensible practices. 

The new state funds come from
non-democratic countries almost without exception. They are used in the
profit search of hedge-funds and Private Equity funds whose
unscrupulousness is hardly suspected. The four new
‚€œpower brokers‚€Ě as they are called by the
McKinsey Global Institute had total assets seeking investment of more than
$8.5 trillion at the end of 2007. In 2000, the sum was around $3.2
trillion. [3] The fear is that the state investment funds will exploit
their economic power. This only astonishes and frightens people with and
without academic backgrounds who think politics and the economy are
different areas ‚€“ two monads so to speak. The changed
power relations could create new realities. Instead of the capitalist
economy holding the strings of politics, politics could use economic power
to realize its goals on the international plane. In any case, the new
‚€œgang of four‚€Ě ‚€“ oil
exporters, Asian state funds, hedge-funds and Private Equity
‚€“ will considerably expand their global finance
hegemony in the next years. [4] For the neoliberal fraction, state funds
pose a dilemma. On one side, private is good and public is bad or evil
from its standpoint. This perspective was important in the recent
defensive discussions in Berlin, Brussels and elsewhere against state
funds. On the other side, the protectionist state intervention against the
‚€œfree capital transactions‚€Ě is also
stylized as evil. ‚€œGood‚€Ě state funds (cf.
the example of Norway) and ‚€œbad‚€Ě are very
hard to distinguish. [5] 

State funds could also act as a
stabilizing element on the capital markets. They have the advantage of not
being dependent on owners of capital pressing for short-term profit
success. Thus they can act strategically in all tranquility without
selling pressure and survive dry periods when the market price slips. Even
non-democratic governments will pay attention to their international
reputation and not immediately expose themselves to reproaches of pure
profit greed for massively violating social-ethical norms. State funds
more than private capitalists will succeed in asserting moral claims and
decrying possible contradictions between words and deeds. There is no
convincing argument that the world economy and the international finance
markets would be served more efficiently with private capitalist actors
than with state actors. 


The finance ministers and central bankers of the G7 met
recently. They agreed something troubling is happening on the finance
markets and that more ‚€œtransparency‚€Ě must
be negotiated. However their real message goes beyond all this in giving
an all-clear signal. There was no protection from the shipwreck of the
Titanic. Hardly anyone involved in the G7-summit knows the name Hyman
Minsky, the ‚€œMinsky effect,‚€Ě the
‚€œMinsky moment‚€Ě and the like. The
Cassandra or prophet of doom misery is repeated again and again. Informed
and interested economic meteorologists knew of the approaching storm on
the US mortgage market before the storm broke out in its whole fury. [6]

The ignorance of the politically and economically powerful
toward Keynesian long-term prognoses about the ending
‚€œeternal‚€Ě growth prosperity and the
necessary change to affluent prosperity (a question of socially reasonable
distribution and working hours policy) is at least a generation old
‚€“ dating back to the 1970s. Hyman
Minsky‚€˜s prognosis also experienced the Cassandra-fate.
Looking-away and denying (cognitive dissonance) continue despite the
‚€œdiscovery‚€Ě of that far-sighted author by
some media catalyzed by the virulent crisis. The Minsky expert Charles
Whalen hopes for a late but politically effective acknowledgment of the
prophet of finance market crises, Hyman Minsky. [7] Minsky himself was a
realistic skeptic. 


1] Zum
√œberblick vgl. Charles Whalen, Understanding the Credit
Crunch as a Minsky Moment, in: Challenge, vol. 51, no 1 (Jan./Feb. 2008),
S. 91-109. 
[2] Hyman Minsky, Can "It" Happen Again? Essays
on Instability and Finance, Armonk, NY 1982; derselbe, The Financial
Instability Hypothesis. Levy Economics Institute Working Paper 74, Bard
College, Annandale-on-Hudson, NY 1992; derselbe, Uncertainty and the
Institutional Structure of Capitalist Economies, in: Journal of Economic
Issues, vol. 30, no 2, (Juni 1996), S. 357-368. 
[3] Angaben nach:
Diana Farrell/Susan Lund, The New Power Brokers. The big four who run the
new global economy, in: The International Economy, Winter 2008, S. 38-42.

[4] Vgl. Farrell/Lund, The New Power Brokers, a.a.O.; Stefan
Schönberg, Sovereign Wealth Alarm. Will the bi sovereign
wealth fund surge lead to European protectionism?, in: The International
Economy, Winter 2008, S. 56-59, 81. 
[5] Vgl. Schönberg,
Sovereign Wealth Alarm, a.a.O. 
[6] Vgl. u.a. die Hinweise bei
Whalen, Understanding the Credit Crunch, a.a.O., S. 91ff. 
"Having worked with him ‚€¶ I know Minsky would not
have been surprised at all by the 2007 credit crunch and its impact on the
U.S. employment report. While the reaction of the main-stream economists
was 'I¬īm shocked', Minsky would likely have just nodded, and
the twinkle in his eyes would have gently said. 'I told you so.'"
Siehe ebenda, S. 105. 

By Karl Georg Zinn mbatko@lycos.com
http://www.mbtranslations.com http://www.corpwatch.org 

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