“The Market” is a Reactionary Mystification: Reply to the Attack on Economic Populism from Franco Debenedetti and other Italian Economists
Webster G. Tarpley
May 23, 2010
A group of Italian economists led by Franco Debenedetti of the famous financier clan and the banker Paolo Savona, obviously fearful that the Berlusconi-Tremonti government of Italy will join last Tuesday’s successful German ban on the type of toxic derivative known as the naked credit default swap, have sent an alarmed warning to the Corriere della Sera of Milan1. Debenedetti has contributed an article expressing similar sentiments to the Italian business newspaper Il Sole 24 Ore in which he rails at the “Mrs. Merkel market” now in force in Germany2. These economists, obviously inspired by the doctrines of Friedrich von Hayek and the Austrian school, want Italy to remain faithful no matter what to the widely discredited ideas of laissez-faire economics, even as those doctrines are everywhere under attack for having caused the current world economic depression. For these neoliberal and monetarist thinkers, any attempt to ban derivatives or tax speculation must be condemned as “economic populism,” which for these writers is a term of opprobrium.
These anti-populist economists need to be reminded of some basic facts about derivatives. The collapse of the Central European banking system in the summer of 1931 was decisively enabled by derivatives – specifically by speculation in wool futures by a north German textile company which brought down the Danat Bank, leading to panic runs on all German banks. Thanks to the American New Deal of Franklin D. Roosevelt, most over-the-counter and exchange-traded derivatives were illegal from 1936 to 1982 under the Commodities Exchange Act, which was repealed by the free-market enthusiast Ronald Reagan. During those years, US rates of economic growth and real wages were far superior to what they have been any time since, and financial panics were much more limited than they had been before or have become since. Presumably, FDR would be dismissed as a mere populist.
In today’s crisis, we are confronted at every turn with the fatal combination of deregulated hedge funds plus these now-rehabilitated derivatives, which in the meantime amount to a world speculative bubble of some $1.5 quadrillion of notional value. Lehman Brothers, Citibank, and Merrill Lynch were destroyed by derivatives in the form of a combination of their issuance of synthetic collateralized debt obligations based on mortgages and consumer debt, together with the credit default swaps used by hedge funds to attack these banks. The insurance company AIG had a hedge fund in London which issued $3 trillion worth of derivatives (more than the GDP of France), featuring a very toxic portfolio of credit default swaps. The failure of AIG caused by these toxic bets has now cost the US taxpayer $180 billion and counting. The attack on Greece, as these economists seem to recognize, was organized during a dinner party in Manhattan on February 8, 2010, leader reported in the headline story of the Wall Street Journal on February 26, 20103. European taxpayers are now on the hook for almost $1 trillion in bailouts as a result of this speculation. That Manhattan hedge fund dinner seems to fulfill the prima facie specifications of an illegal conspiracy in restraint of trade under the terms of the US Sherman Antitrust Act of 1890, a law proposed all those years ago by a very Republican senator and signed by Benjamin Harrison, a very Republican president. Were they populists too?
The May 6, 2010 1,000-point fall of the Dow Jones Industrial Average was the result of a speculative bet using options (i.e., derivatives) against the Standard & Poor’s 500 stock index placed by the Universa Investments hedge fund, advised by “Black Swan” theorist Nassim Taleb – according to the Wall Street Journal of May 11, 2010. That thousand point plunge, it is estimated, wiped out about $1 trillion worth of paper wealth in about 20 minutes. What with a trillion here and a trillion there, derivatives and the regulated hedge funds are becoming a prohibitively expensive luxury.
Debenedetti and his friends wish to save credit default swaps at all costs. In this they face serious problems. On one level, credit default swaps are bets, wagers, and therefore illegal under the gambling laws in many countries. If it is argued that credit default swaps are insurance, then they are also illegal, since most of the issuers are not insurance companies, and have no intention of meeting the legal requirements to underwrite insurance policies, such as legal registration, capital requirements, etc. Are credit default swaps such a glorious benefit to society that they should enjoy exemption from laws and regulations? Recent history indicates that derivatives do not merit such special treatment.
Debenedetti and his friends are also opposed to a Tobin tax, otherwise known as a Wall Street sales tax, financial transaction tax, securities transfer tax, trading tax, or Robin Hood tax, which would be levied on the financial transactions of market players. Debenedetti & Co. therefore want derivatives and other financial instruments to enjoy yet another exemption. In Italy, the vast majority of goods and services must pay a hefty Value Added Tax (VAT or IVA). Parents who want to buy shoes, clothing, and school supplies for their children must pay this tax. But for some strange reason, banks and hedge funds do not pay on their flash trading, program trading, and high-frequency trading. We can guess that the total deficit of governments at all levels in Europe, the United States, and Japan is closely correlated to the total exemption of financial institutions from IVA or sales tax on their turnover. To argue that this de facto public subsidy for speculation should be continued in an era when so many other activities are being heavily taxed or subjected to austerity cuts is reminiscent of the mentality of the French aristocracy under the pre-1789 ancien régime, which claimed that it had the divine right not be taxed under any circumstances. This claim, as we know, did not hold up.
At the heart of the arguments put forward by Debenedetti and his friends is the notion that human reason is very weak indeed, and cannot attain a practical understanding or overview of how political economy works. Only the market, they claim, can do with this by totalizing so many separate facts. But they are not arguing from any empirical observation of how markets really work, but expressing the fetishism of an efficient market which was typical of von Hayek and other Austrians. They tried to portray markets as genuine epistemological tools, which provided knowledge which could not be obtained any other way. Even the Ayn Rand devotee Alan Greenspan has backed away from this extravagant claim in the wake of the catastrophic collapse of the New York banks in October 2008. When asked whether he had been led astray by his market ideology, Greenspan told a Congressional hearing: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.” (New York Times, October 23, 2008) Debenedetti does not share this distress. At the same time, the successful history of the Bank of the United States under Alexander Hamilton, the French Commissariat du Plan under DeGaulle, and the Japanese Ministry of International Trade and Industry (MITI)) makes clear to human reason is indeed capable of determining the main priorities of national economies.
Market fetishism is radically anti-historical. Everyone is aware of speculative manias, bubbles, panics, and the other recurring psychoses which make the judgment of any market totally unreliable in many critical moments. And what if there are monopolies, duopolies, oligopolies, trusts, combinations, or cartels of the February 8 type? Then the market is permanently distorted, which is what we have been seeing for decades.
Debenedetti wants “the market” to be seen as objective and impersonal, but it is not. “The market” has names and faces. If we find that half a dozen of the largest US banks control about 60% of all assets in the entire United States economy, then we can make that exorbitant control very personal and concrete. The owners of a majority share of the United States are bankers like Jamie Dimon of J.P. Morgan Chase, Vikram Pandit of Citibank, Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, and Brian Moynihan of Bank of America/Merrill Lynch, and their respective boards. We can even know how many billions each one has been given in the form of bailouts at public expense.
The Austrian school makes the market into a metaphysical abstraction, a force above the rest of history, because it needs this mystification in order to defend the very concrete privileges of some very sleazy individuals who are the speculators. Some early Protestants tried to argue that the success of the speculator had been instituted by God. When this idea lost traction, apologists for speculation tried to argue that the speculators were morally or intellectually superior to the rest of humanity. When that did not work either, the Austrian school hit upon the trick of removing the speculators from consideration altogether by hiding them from view behind the anonymous and impersonal abstraction of “the market.” As the case of Greenspan suggests, this argument has also become untenable, and the entire edifice of Austrian thought is falling to the ground.
Debenedetti and his co-thinkers suggest that “the market” is able to detect the secret financial weaknesses of nations. But surely the shoe is on the other foot. The major US banks listed above were all, without exception, bankrupt and insolvent before US government intervention in the form of the bailout of October 2008. Today, any objective appraisal would conclude that Greece is far more economically viable and solvent then Citibank. Portugal is more viable than Goldman Sachs. Italy has a brighter economic future by far than J.P. Morgan.
The situation today would therefore seem to offer the following alternative. The speculative assault of the zombie banks and hedge fund speculators may succeed in bankrupting the modern nation state at all levels, in which case we will be dealing with the collapse of civilization as we have known it since the first prototype of the modern state emerged in Milan in the late 14th century under Giangaleazzo Visconti, who offered debt relief to strapped farmers. The better alternative is that the nation state will use its inherent sovereign powers to liquidate the bankrupt zombie banks and regulate many of the predatory activities of hedge funds out of existence, while banning the most toxic forms of derivatives and forcing speculators to share in the general tax burden of society.
Those who want the second of these alternatives must get to work here and now. The most obvious way to begin is for the present Italian government of Berlusconi and Tremonti to join the measures instituted by the German government last Tuesday. Italy should also go beyond these tentative initial German measures by banning all forms of credit default swaps, which are already inherently illegal under existing laws. Then there are those extremely dangerous synthetic collateralized debt obligations, which even Blankfein of Goldman Sachs has suggested might be done away with. They should indeed be totally banned at once. Antitrust investigations could be opened against the Feb. 8 hedge fund group by the Italian magistrates, whose independence has become world-famous. The Tobin tax should also be instituted on an emergency measure for financial stability and revenue enhancement on a purely national basis, with the revenue being retained for the benefit of the national budget.
Additional countries may soon join in the German ban. Likely candidates are the nations that were closely associated with the D-Mark in the old “snake in a tunnel” currency bloc starting in the 1970s. These would include Belgium and the Netherlands. The Czech Republic is another possibility, as is Sweden. Soon we may have a pro-derivatives bloc led by the US and the UK confronting an anti-derivatives bloc led by Germany. On the eve of the Washington Economic Conference of November 2008, I wrote: “The best we can hope for … is … dividing the world between a US-UK dominated derivatives bloc and a Brazil-India-Russia-China-South Africa anti-derivatives bloc interested in real physical commodity production, not fictitious capital.” The surprise is that the leadership of the anti-derivatives forces has actually been seized by Germany.
 Franco Debenedetti, Oscar Giannin, Antonio Martino, Roberto Perotti, Nicola Rossi, Paolo Savona, Vito Tanzi, Alberto Mingardi, “In difesa del mercato e degli operatori i responsabili veri e presunti della crisi,” Corriere della Sera, May 21, 2010, http://archiviostorico.corriere.it/2010/maggio/21/difesa_del_mercato_degli_operatori_co_9_100521085.shtml
 Franco Debenedetti, “È il mercato signora Merkel,” Il Sole 24 Ore, May 21, 2010, http://www.ilsole24ore.com/art/SoleOnLine4/Editrice/IlSole24Ore/2010/05/21/Italia/17_A.shtml
 See “Financial Warfare Exposed: Soros, Goldman Sachs, Hedge Funds Attack Greece to Smash Euro,” http://tarpley.net/2010/03/04/financial-warfare-exposed-soros-goldman-sachs-hedge-funds-attack-greece-to-smash-euro/