When the very wealthy few control the nation’s economy and its politics, it’s called a plutocracy. And a plutocracy is what the United Stated is fast becoming, if it isn’t there already.
The latest evidence is in the massive losses announced last week by another “too big to fail” financial institution. This time, it’s JP Morgan Chase that played fast and loose with investors’ funds and got burned. Its wager on unsecured credit derivatives turned sour last month, and, after trying to patch up some balance sheets and make things look a little better, CEO Jamie Dimon went public to announce that the company was taking a massive hit on its investments.
If this news sounds like a form of déjà vu, it should. It was just four years ago when Lehman Brothers announced massive losses for similar bad gambles (those on mortgage-based derivatives) that led to the major financial crisis from which the country is still struggling to emerge.
At the time, fingers were pointed everywhere (the politicians, the regulators, the banks, the defaulting homeowners, the mortgage companies—Fannie Mae being the most notorious—that made the risky loans, and even the investors who trusted the banks that made the bad bets), but no one went to jail and no one was ever really held accountable.
As a result, despite the passage of a financial reform law (Dodd-Frank), the same kind of risky investments by the world’s largest financial institutions continue to put the nation’s economy at risk.
Dodd-Frank was a watered-down attempt at re-regulation of the financial industry. But it left federal regulation of the investment banking industry largely in the supervisory, as opposed to investigatory, realm. And it allowed “too big to fail” banks to continue, not only to exist, but to do exactly what JP Morgan Chase has done.
A brief primer on derivatives trading may help to shed some light on the problem. Derivatives are products that are not represented by hard assets. (Mortgages, by contrast, are represented by hard assets: the collateral for the loan.) Instead of representing real cash or things that can be readily converted to real cash, derivatives represent bundles of debts, debts that will either increase in value as economic conditions improve or decrease in value as economic conditions decline.
In essence, dealing in derivatives is like gambling on a trifecta in a horse race. First you have to pick the right trio of horses, which you may be able to do based on their track records. But then you have to hope that all of the other horses don’t outperform their expectations and that your horses live up to theirs.
And then there are the imponderables, like a jockey having a bad day, or a horse suffering from the equivalent of a bad cold, or a sudden change in the weather causing a change in the track conditions, or a hundred other uncontrollable and sometimes invisible factors. Folks who play trifectas are gambling far beyond their own ability to pick a winner. They’re gambling on luck.
And that is pretty much what big-time bank investors are doing when they invest their depositors’ money in derivatives. When those derivatives go bad, there isn’t any collateral to fall back on. The paper that represents the derivatives becomes worthless, and the bank suffers a loss – a loss of its depositors’ money.
Now we knew all of this before 2008. In fact, some of us wrote about it. And we certainly knew about it after 2008. All of us knew, not just the politicians we elected, but all of us who were affected by the financial collapse and the economic crisis that was precipitated by the bad derivatives trading by Lehman Brothers, AIG, and a host of other investment banks. We all knew that these behemoths of our financial industry had brought us to the brink with their crazy gambling on uncollateralized derivatives.
So how could the same thing happen again, even with a Democrat in the White House and his party controlling majorities in Congress for the first two years of his term?
It could happen again because our ruling elite are more beholden to the wealthiest individuals and corporations in the country than they are to the rest of us. They are more concerned with the need to appease those who control the bulk of the wealth in the country than they are with those who comprise the bulk of its population.
The theory that they bow to is that free markets, markets free of government interference, will self-regulate the kind of abuses this latest JP Morgan Chase scandal represents. That theory is based on centuries-old thinking, as laid out by Adam Smith in his classic, “The Wealth of Nations.”
But that book was published long before banks became as monstrously large and all-powerful as they are now, and many would argue that were Mr. Smith alive today, he would rail against the kind of “free market” system those banks and other financial institutions demand.
Just a moment’s thought reveals the fallacy of the “free market” form of self-regulation as regards trading in derivatives. Just what market unit would be the inhibitor for risky deals? It certainly wouldn’t be the individual depositor who would have no way of knowing whether this crop of JP Morgan Chase money handlers were high risk types or more conservative. Nor would it be the big players, like California’s CalPERS, that invest millions at a time in the largest financial institutions. And it wouldn’t be government agencies, since they are on the sidelines in a free market system.
Adam Smith’s vision is completely antithetical to a plutocratic society in which the very few very rich control the fates of the very many who are struggling to make ends meet. In a plutocracy, free markets are a mirage. The reality is that the masses have a total lack of freedom and are the pawns of the few.
That is what the United States is becoming, and the JP Morgan scandal is yet more evidence of just that fact.