The Finance Curse

How Global Finance Is Making Us All Poorer

Nicholas Shaxson

• Publisher: Grove Press
• Year: 2019
• ISBN:
  9780802146380
• Topic: Business
• Subtopic: Financial Services
• Index: Business

An "artfully presented [and] engaging" look at the insidious effects of financialization on our lives and politics by the author of Treasure Islands ( The Boston Globe ). How did the banking sector grow from a supporter of business to the biggest business in the world? Financial journalist Nicholas Shaxson takes us on a terrifying journey through the world economy, exposing tax havens, monopolists, megabanks, private equity firms, Eurobond traders, lobbyists, and a menagerie of scoundrels quietly financializing our entire society, hurting both business and individuals. Shaxson shows how we got here, telling the story of how finance re-engineered the global economic order in the last half-century, with the aim not of creating wealth but extracting it from the underlying economy. Under the twin gospels of "national competitiveness" and "shareholder value, " megabanks and financialized corporations have provoked a race to the bottom between states to provide the most subsidized environment for big business, encouraged a brain drain into finance, fostered instability and inequality, and turned a blind eye to the spoils of organized crime. From Ireland to Iowa, he shows the insidious effects of financialization on our politics and on communities who were promised paradise but got poverty wages instead. We need a strong financial system—but when it grows too big it becomes a monster. The Finance Curse is the explosive story of how finance got a stranglehold on society, and reveals how we might release ourselves from its grasp. Revised with new chapters "[Discusses] corrupt financiers in London and New York City, geographically obscure tax havens, the bizarre realm of wealth managers in South Dakota, a ravaged newspaper in New Jersey, and a shattered farm economy in Iowa... A vivid demonstration of how corruption and greed have become the main organizing principles in the finance industry." — Kirkus Reviews

CHAPTER ONE

Sabotage

Some economists behave like aliens who sit in spaceships high above Earth, watching us through powerful telescopes. They record all the scurrying back and forth, then build theories and mathematical models about what we’re up to, without properly accounting for folly, cruelty, sex, friendship, patriotism, credulity, and the general rough-and-tumble of our crazy, emotional lives.

One economist who perceived both the economic behavior and the emotional complexity, and can consequently help us understand the finance curse, was an early-twentieth-century Norwegian American called Thorstein Veblen, an extraterrestrial of a different kind. An unlikely figure, he perched himself outside the normal range of human experience, and this enabled him to sit far enough back from humanity to observe our foibles clearly, so he could use them as a starting point for properly understanding the world of money and business. Veblen rebelled against the conventional wisdom. He has been called an American Karl Marx and the Charles Darwin of economics, but in truth his varied output is too diverse and weird to categorize. Yet his nuanced understanding of messy human behavior is exactly what makes his ideas so remarkable—and useful. By linking economics with uglier truths about how we as humans really behave and think, he discerned many of the deepest principles that underpin the finance curse.

Veblen was an economist, sociologist, womanizer, and misfit. He made his own furniture but didn’t make his bed in the morning, and he would let his dishes pile up in tottering heaps before washing them all in a barrel with a hose. It is said he once borrowed a sack from a neighbor just so that he could return it with a hornet’s nest inside. In his florid, peculiar writing style he described religion as “the fabrication of vendible imponderables in the nth dimension,” the main religious denominations as “chain stores,” and their individual churches as “retail outlets.” At the fiercely religious Carleton College in Minnesota he poked fun at mathematical economics by asking a student to calculate the value of her church to her in kegs of beer, and he provoked uproar with a speech entitled “A Plea for Cannibalism.” A lank-haired weirdo genius, he observed society unencumbered by strictures of religion, economic conventions, or the petty airs and graces of the early twentieth century that kept the grubby workers down and the landed gentry in their rightful place. His apartness let him see things others couldn’t and helped him say the unsayable.

Born to Norwegian immigrant parents in rural Wisconsin in 1857, Veblen was the sixth and the smartest of twelve children. The farmstead where he grew up was so isolated that when he left he was, as one historian put it, “emigrating to America.” His brilliance took him from these humble beginnings to Yale, where he got a PhD in 1884, before going to ground and mooching around listlessly for several years. “He read and loafed,” his brother remembered, “and the next day he loafed and read.” Some said he was unemployable because he hated Christianity or because he had a prejudice against Norwegians. His oddball, sardonic wit surely didn’t help, nor did his open contempt for economists and other academics. He clashed repeatedly with university authorities but also relished scholarly cut and thrust, calling himself “a disturber of the intellectual peace” and “a wanderer in the intellectual no-man’s land.”¹

It wasn’t all solitude, though. He was later ejected from the University of Chicago for marital infidelities with colleagues and students. As one story goes, the dean summoned Veblen into his office in 1905 for a chat.

DEAN: We have a problem with the faculty wives.

VEBLEN: Oh yes, I know. They’re terrible. I’ve had them all.²

Veblen’s womanizing prowess wasn’t due to his looks. Longish hair was plastered down on either side of a center part; bushy eyebrows and a roughly cut mustache and beard suggested he hadn’t tried very hard to discard his Norwegian peasant-farmer upbringing. One lover apparently described him as a chimpanzee. Others remembered a weird domestic charisma. “Lounging about in his loose dressing gown and looking not nearly as anemic and fragile as in his street clothes, he reminded one, with his drooping moustaches and Nordic features, of nothing so much as a hospitable Viking taking his ease at his own fireside,” a visitor recalled. “At such times, he was at his best, doling out curious information, throwing off a little malicious gossip which, in view of his seclusiveness, he must have picked miraculously out of the air, mixing picturesque slang with brilliant phrases of his own coinage, solicitously watching out for his guests’ comfort.”³

This charisma extended to the realm of ideas and gained him a following that has endured more than a century after his death. He vivisected capitalism, impaling Victorian and neoclassical economists, who regarded humanity as a set of identical, perfectly informed, “utility-maximizing” individuals and firms pursuing their own self-interest, to be treated as data inputs for their mathematical sausage-making machines. In these economists’ hands, he acidly observed, a human became “a lightning calculator of pleasures and pains, who oscillates like a homogenous globule of desire of happiness under the impulse of stimuli.” Such economists, he jeered, would take “a gang of Aleutian Islanders, slashing about in the wrack and surf with rakes and magical incantations for the capture of shellfish,” and shovel them all into equations about rent, wages, and interest. Bring back history, he lamented. Bring back politics. Bring back real life. He had a point then, and he would still have a point today.⁴

Veblen’s best-known book, The Theory of the Leisure Class, published in 1899, is a vicious exposé of a world where productive workers toiled long hours and parasitic elites fed off the fruits of their labors. The wealthy also engaged in “conspicuous consumption” and “conspicuous leisure”—wasteful activities to show others they were so rich they didn’t need to work. Plutocrats always wanted more wealth and power, he noted, and, worse, their petulance and excesses generally provoked not anger but reverence! The oppressed masses didn’t try to overthrow their social betters; they wanted to copy them. (The popularity of shows like Keeping Up with the Kardashians might be the modern equivalent.) Twentieth-century man, he concluded, wasn’t that far removed from his barbarian ancestors.

Veblen’s next big book, The Theory of Business Enterprise, published in 1904, got less attention but was more radical and more important.⁵ In it, he contrasted industry and the “machine process”—the productive engineers and entrepreneurs who rolled their sleeves up and made useful stuff—with what he called the “business” of making profits. Above the foundation of production rose a financial superstructure of credit, loans, ownership, bets, and markets to be controlled and milked. While Marx had focused on tensions between workers and factory owners, Veblen concentrated on a different but related struggle: between wealth creators and wealth extractors. Makers versus takers; producers versus predators. If it helps, picture a group of old men in top hats, manipulating a Rube Goldberg–like contraption of spindly pipework perched on top of the economy, hoovering up coins and notes and IOUs from the pockets of the workers and consumers toiling away underneath.⁶

Generations of economic thinkers had known about this distinction at least as far back as the publication of Adam Smith’s The Wealth of Nations in 1776.⁷ The main problem, though, was that people disagreed about who the wealth creators were. A conservative tradition holds that they are the rich, the owners of money and capital, who build the factories, then get taxed by government, which redistributes their wealth to the poor and to the recipients of handouts. It’s a view that had long been promoted by the likes of John C. Calhoun, a former US vice president and secretary of war who had been a leading defender of slavers and plantation owners. Calhoun, the “Marx of the Master Class,” did everything he could to try to safeguard “the rights of the radical rich,” as the historian Nancy MacLean puts it: the rights of wealthy elites against “oppression” by democracy and by the “tyranny” of majority voting.⁸ Calhoun’s modern equivalent would be today’s billionaire classes, who lobby, finance think tanks and political candidates, and even create media empires so as to skew and rig the laws of the land in their favor. In their view of history, it’s the poor and disadvantaged who are the leeches, preying on the capitalists.

But Veblen was having none of it. He compared the rich wealth extractor to a self-satisfied toad who “has found his appointed place along some frequented run where many flies and spiders pass and repass,” and he then went a whole step further, into more controversial terrain. Many businessmen get rich, Veblen went on, not just through extraction, like the lazy toad catching passing flies, but through active sabotage—or, as he put it in his spiky language, “the conscientious withdrawing of efficiency.” These players, he said, interrupt the regular flow of outputs, shaking the tree so they can more easily make off with the fruit.⁹

Nonsense, the critics sneered. Who’d do such a rotten, foolish thing?

Lots of people, it turns out. Veblen had brutally exposed one of capitalism’s great open secrets. Here it is: big capitalists don’t like efficient competition, and they don’t like free markets. They say they do, but genuine competition drives down prices and drives up wages—and so reduces profits. What they really like are markets rigged in their favor and against workers, consumers, and taxpayers. That’s where the big money is. Instead of competing against each other they conspire against consumers: “It became a competition not within the business but between the business as a whole and the rest of the community.” This conflict is at the heart of the finance curse.

The Theory of Business Enterprise came out in the wake of what was then, and may still be, the most impressive feat of investigative journalism in world history. This was an exposé of John D. Rockefeller’s Standard Oil monopoly by the journalist Ida Tarbell, who uncovered a conspiracy and cartel the likes of which the world had never seen. Rockefeller, she revealed, was a master of Veblenite sabotage, rigging markets in the production and distribution of oil and its refined products, buying or elbowing out rivals in a ruthless and sometimes violent quest to build an America-wide monopoly. Her articles, serialized in McClure’s magazine from 1902 to 1904, opened with a picture of rugged young men carving out new frontier towns in the Pennsylvania oil fields.

Life ran swift and ruddy and joyous in these men. They were still young, most of them under forty, and they looked forward with all the eagerness of the young who have just learned their powers, to years of struggle and development. They would make their towns the most beautiful in the world. But suddenly, at the very heyday of this confidence, a big hand reached out from nobody knew where, to steal their conquest and throttle their future. The suddenness and the blackness of the assault on their business stirred to the bottom their manhood and their sense of fair play.¹⁰

In one Rockefeller operation a hundred ruffians descended on Hancock, a town in Delaware County, New York, in 1892 to prevent a competing pipe from being laid. As another account put it,

Dynamite was part of their armament, and they were equipped with grappling irons, cant-hooks, and other tools to pull the pipe up if laid. Cannon … are used to perforate tanks in which the oil takes fire. To let the “independents” know what they were to expect the cannon was fired at ten o’clock at night with a report that shook the people and the windows for miles about.¹¹

The independents abandoned Hancock. A more overt act of business sabotage is hard to imagine.

Tarbell’s explosive articles were an obsessive labor of love and loathing. She had watched her own father, a small-time oilman named Franklin Tarbell, transmogrified by Rockefeller’s ruthless tactics from genial, loving father into a grim-faced, humorless shell. “Take Standard Oil stock, and your family will never know want,” Rockefeller crooned to the victims of his semilegal practices. He would offer to swap their degraded business interests for Standard Oil stock, offering the equivalent of pennies on the dollar, while assuring them that they would be much better off with him because, he admitted, “I have ways of making money you know nothing of.” Franklin Tarbell held out and paid a heavy price, so much so that his business partner killed himself. Ida’s father “no longer told of the funny things he had seen and heard during the day,” she remembered. “He no longer played his Jew’s harp, nor sang to my little sister on the arm of his chair.”

Rockefeller paid bribes and kickbacks. He eliminated rivals through spying, smear tactics, thuggery, and buyouts with menaces. He sabotaged producers of oil barrels, hoarded oil, and squashed middlemen. He secretly financed politicians and haughtily dismissed requests to appear at official inquiries. He covered his tracks, delegating questionable tasks to juniors and avoiding compromising language on internal documents. He expanded overseas, dodging regulations and gaming gaps in the global tax system to become, as one biographer put it, “a sovereign power, endowed with resources rivaling those of governments.”

It takes time, Tarbell noted, to crush men who are pursuing legitimate trade:

But one of Mr. Rockefeller’s most impressive characteristics is patience. He was like a general who, besieging a city surrounded by fortified hills, views from a balloon the whole great field, and sees how, this point taken, that must fall; this hill reached, that fort is commanded. And nothing was too small: the corner grocery in Browntown, the humble refining still on Oil Creek, the shortest private pipe line. Nothing, for little things grow.¹²

In the early days of Rockefeller’s business operations, corporations weren’t allowed to do business across state lines, but he had found a loophole. He brought all his different state corporations together under the ownership of a trust, a flexible and powerful mechanism of central control that could operate at a national level and in great secrecy. (This is why anti-monopoly laws and actions have been known as “antitrust” measures ever since.) Through his trust mechanism, Rockefeller soon controlled over 90 percent of the oil refined in the United States, extracting vast wealth from consumers and generating fountains of profit, which were funneled beyond the core business into railroads, banking, steel, copper, and more.¹³ If this reminds you of today’s Amazon, you’re on the right track. It is no coincidence that Rockefeller was America’s biggest monopolist and also its first billionaire—and that Amazon’s boss, Jeff Bezos, is the richest person in world history. Monopoly was, and still is, where the big money is.

Rockefeller was in fact just one of several robber barons dominating the American economic landscape in Veblen’s day. There were monopolies in beef, sugar, whiskey, shipping, railroads, steel, cotton, textiles, and furs, and the rulers of these fiefdoms amassed fortunes so great that their names (Rockefeller, Carnegie, Vanderbilt) still resonate today.

But one force eclipsed them all, a financial monopoly. In 1913, nearly a decade after Veblen published The Theory of Business Enterprise, a US congressional committee produced its now famous Money Trust Investigation, a report exposing a grand conspiracy of American business leaders to rig half the national economy. Rockefeller was implicated, but it was bigger than him or Standard Oil. The Money Trust documented a monstrous interlocking lattice of at least eighteen major financial corporations and more than three hundred crosscutting directorships and secret lines of control that governed much of industrial America and manipulated the financial clearinghouses and the New York Stock Exchange.¹⁴ It was based on a rogues’ charter known insidiously as “banking ethics,” by which the conspirators agreed not to compete with one another. Atop it all sat a banker, John Pierpont Morgan.

The report warned chillingly that there were forces more dangerous than monopoly in industry: the greater danger was monopoly in finance, control of the means by which credit was allocated to industry and across the economy. If you controlled credit, it warned, you controlled it all. “The acts of this inner group [have] been more destructive of competition than anything accomplished by the trusts, for they strike at the very vitals of potential competition in every industry that is under their protection,” it said, adding, “The arteries of credit [are] now clogged well-nigh to choking by the obstructions created through the control of these groups.” Finance doesn’t have quite the same brutal style or degree of control today, but as this book will show, it has gone a long way in this direction.

When the Money Trust report went public, national fury ensued. Political cartoonists drew octopuses with their tentacles wrapped around buildings, men in top hats grasping the globe, bankers si...