In general, there’s a conflict with the ratings agencies
because they are a bit of a proxy regulator, given power through the federal
government to rate bonds and other financial instruments, and so many other
bodies can’t invest their money in a financial instrument unless it has a
certain rating from certain ratings agencies. Moody’s, S&P, and to a lesser
extent Fitch have a stranglehold on the system because they’re written into law
and there are high barriers to entry to starting a new rating agency. Anyways,
there is the conflict because they exist in a market, but the companies that
they rate pay them.
So there is this question about how independent the ratings
are, since if they don’t get the rating, they like from one agency, they can
just walk down the street to another. And then there is the prestige issue,
where the people packaging financial instruments have more power because they
work at Goldman and make multiples of what someone at a ratings agency does.
Overall, I think this relationship had a big effect in the run up to the
financial crisis because the CDOs were being rated AAA for even their riskiest
tranches because there was a fundamental lack of underwriting going on and the
ratings agencies were not ready to push back against these banks to say that
you’re selling people trash that will blow up. Of course being real close to
the day to day activity, you really don’t have the perspective to say that this
will be one of the things that makes the whole house of cards fall down, but at
least you can say that the credit on these mortgages is too bad, and you’re not
taking in account correlation risks, and there is a chance that house prices
may go down. The riskiest 5% of these are not as good as treasuries.
Thinking if the ratings agencies went away for some reason,
the first thought is to say good riddance. But the second thought is that there
is a lack of information in the marketplace by not having these
quasi-independent bodies, overall it would drive up costs in the market and
make borrowing more expensive for everyone. What it would more likely would do
is make a mirror of the equity market. The larger companies would get
independent research done, so Disney and US Steel could issue bonds, but for
smaller and less liquid offerings, that is where costs would go up the most –
bifurcation the market so that the rich got richer. Hopefully the state would
step in to offer truly independent ratings until that agency got captured.
When financial markets channel funds from savers to
investors, who benefits?
The simple answer to that question is that everyone benefits
when financial markets channel funds from savers to investors. The saver, who
might have very few options about where to put her money – in the book the
author jokes about putting it under the mattress – with a functioning financial
system can achieve greater return on her money. The investor wins because they
now have capital. Having an idea to make or do something novel to fill a niche
in a marketplace is worthless unless you have capital to invest. With a healthy
financial market, you can go and get funds to facilitate your new idea that
helps you undercut the local taxi market or local hotel market. Your idea can
come to fruition when previously you had top hope to be individually wealthy or
have the right connections.
But there’s more! By facilitating that transaction, where
the savers and the borrowers benefit, it is not isolated to those parties.
Society benefits, as there is now the thing that was not existing in our
alternate world without good financial markets. You have Uber instead of
calling a cab and hoping that their credit card machine isn’t “broken”, and
they are ok with driving you to your neighborhood at that time of night.
And then, for their efforts, the financial market makers get
a nice little sliver of the action to reward them for their coordination
efforts. Just a little though.
One of the best things about our democracy is that at the local level, we can all have a voice that we might not feel we have when we think of the people we send to Washington to make policy, no matter what side you feel yourself rooting for.
The flip side of local control is that many people let others chose for them - who runs and who votes. In Brookfield, there are about 19,000 people. The Village Board was contested, but of the 13,269 people registered to vote, only 2,716 cast ballots in the election. My name was down the ballot, but enough of you chose me to serve that I now have the opportunity to do so.
Today I was sworn in as the newest member of the Brookfield Library Board of Trustees. I’m glad I have the opportunity to serve, and I hope that my experience and education allows me to fully represent not just the 1,936 people who checked the box by my name or everyone who voted - but all 19.000 of us. I will be the best steward of your tax dollars that I can be, and will help make Brookfield Brighter for the 21st century.
In a class recently, we had a discussion on
the stagist theory of growth that was supposed to be answered several weeks in
the future. I went early to the message board and posted that “Human
civilization has manifested itself in a series of organizational structures,
each determined by its primary mode of production, particularly the division of
labor that dominates in each stage. 1) the tribal form, 2) primitive communism,
3) feudal or estate property, 4) capitalism”. I posted this without citing
Marx, and it was mostly done in jest. When I posted it, I was unaware of the
Rostow model of growth theory, where we move from traditional society to “the
preconditions for take-off” to take-off to modernity where the economy is mature,
and the people are mass consuming (Cypher 189-192).
What the Marxian framework and the
Rostow model share is that, as Cypher notes, they are an attempt at a
universalist model of development (187). So, if you follow either of them, then
all societies must pass through these stages. If you subscribe to either one of
these fully, then you social and economic prescriptions become based on moving
the country of interest through these stages. My thinking on this goes to
arguments in the late nineteenth century about the possibilities of the
development of a communist state. The argument was that it was the most
Capitalists states that would move to the next inevitable step first. This led
people to think that it would be England and Germany that would be the first
homes of the universal brotherhood of the worker’s state. And well, we can see
that the lens of history disproved that, as it was the giant Russian state that
was levered into the international vanguard as the first communist state. There
was a big problem with this in terms of Marx’s theory of stages in that Tsarist
Russia was agrarian, so that one of the first things that had to be done for
the new Soviet Union was to industrialize it. The fact that they did
industrialize as much as they did in the years prior to the Great Patriotic War
is a feather in the cap of the Soviet system and its leadership (though at much
human cost).
The problem with both Marx’s
outline and Rostow’s is that it tries to universalize experience based on a
narrow understanding of how the world works through limited history (Cypher
187). A too-narrow understanding of how history can develop leaves all other
possibilities on the outside looking in. If we want to say that all nations
must move through these stages and then the only logical endpoint is the last
of the numbered states, it limits the possibilities of what growth and
development can look like. It takes the path dependency that we created for
ourselves and maps it upon another set of people. Though there have been
benefits to our mode of take-off and modernization, there have been social and
environmental costs that we do not necessarily have to grant to people in the
name of development. Both models are well in parallel, with Rostow adding finer
graduation, but they have the same end point, a developed world (Marx just
wants to see a different set of people own the capital).
Works
Cited
Cypher, J. M. (2014). The process of economic development.
London: Routledge, Taylor & Francis Group.
Today I want to examine the role of the multi-national corporations in development. These bodies are not new. In an earlier post, I mentioned the effect of the South Sea Companies, but the current corporations are perhaps even more pernicious. This is because where the former corporations were arms of the state with some sort of protected monopoly, the new corporations are stateless. We can talk about where these corporations are located, where the US went to war in Latin America to protect the United Fruit Company or even more broadly the forever war in the MENA to protect the Good Arabs against the Bad Arabs and Persians and to ensure continued oil flows, but even wars started 20 years ago feel like relics of the past. The modern, globalized economies no longer have oil companies or industrial giants at the top of the leaderboard of market capitalization. Instead we have more nebulous technology companies where Amazon and Apple and Microsoft are pushing a trillion dollars in market capitalization, though they gave a large percentage of that paper wealth back over the winter. What we see is that the multinational corporations have more power than the most powerful states. In the United States, the corporations have been dodging taxes for years by claiming that the revenue that they created really was created in low-tax jurisdictions through accounting tricks like selling intellectual property to a subsidiary in Ireland and then leasing back the rights to that intellectual property to the parent company. The US has twice enacted one-time repatriations where they lowered the tax rate in hopes that the corporations would move that capital back to where they are technically domiciled and invest in the US, but when it happened instead the money went right to dividends and buy backs. The recent tax changes wiped forty percent off the top corporate rate from 35% to 21% because the people in charge are so beholden to the wealth and power of internationalized capital. It feels like a very vulgar and superficial analysis, but it has power because it is true.
The age of globalization is the age of the large corporations, and that is depressing because at the very least the age prior to or postmodern period was driven by state actors who were accountable in theory to its citizens. We see that even Apple can subvert the will of the citizens of the United States and take advantage of all the benefits that helped it grow from the technology developed in American universities and the giant market that a post-war industrialized economy built. They then take access to that market and do not reinvest in it, instead concentrating wealth in the hands of the stock-holders which is a small minority of even the United States. What I worry about in development is the impossibility of development upwards. There is still manufacturing that needs to be done. It keeps getting shifted to lower cost areas from China to Vietnam to Bangladesh to Ethiopia. There is arbitrage in terms of what needs to be paid for labor and the environmental standards that factories will be held to, and subcontract arrangements so that the miners and the manufactures can claim reasonable deniability when a factory collapses or a tailing dam collapses, and thousands are killed and a river basin is poisoned for a generation because it was cheaper to do that than to build in the protections from the beginning. I worry about convergence because this is happening but faster — corporation are leaving Bangladesh before it becomes self-sufficient and moving on, yet the industrial base is not there yet. I worry that Brazil will give away the rights to the Amazon rainforest so that it can be logged to the soil and then farmed to exhaustion quickly because the soil was not made for farming. I worry that countries from the most developed to the least are giving control to the corporations because the only thing worse than being exploited is to not be exploited. I worry that the multilateral organizations are forcing the hands of many countries because part of the restructuring process is opening the markets though we have seen from Chang and other how important it is to protect the industrial base of developing countries in a managed way, and not to expose a nascent industry to the full onslaught of the market.
It is not just the seeming impossibility of development upwards that concerns me. What we see with the current mood in the United States is illustrated by authors like Branko Milan and Thomas Piketty, in that the postmodern, globalized economy, there is a reconcentrat8ion of wealth. Where the industrial economy, there was a much broader sharing of the wealth so that in the west the postwar era gets called the “Golden Age of Capitalism” or “Les Trente Glorieuses” to indicate a more inclusive economy where capitalism worked — if you were a straight white male in the west. The less inclusive growth has presaged a political mood that has seen the rise of political movements like neo-fascism in the rise of Donald Trump and Victor Orban and Recep Tayyip Erdoğan and Brexit. This is all in the face of an incredible shifting of the ground that the economic battle is fought on. Global climate change is a fact and is not just in the rising sea levels. In the near term we must deal with the melting of the Himalayan glaciers which provide water to billions of people in Asia. Deserts are spreading in Australia and Africa, and farmland in coastal regions is becoming impossible to grow crops on because the ground is salinized. And what is the response of global capital? They celebrate the possibility of shipping times being shortened through an ice-free Artic Ocean.
There then is a real question to be asked about what kind of policies you can make as a country that has little leverage. The world, which is burning, is more and more controlled by multinational corporations. There is still a twofold response that is available. The first is that there is a second mover advantage. It is incredibly arrogant to say from the standpoint as a western observer that the less developed countries are stuck in their relative and absolute positions. There remains a possibility for growth that is not as harmful for the planet and allows for moving to a more comfortable existence. Through a green-focused growth strategy, LDCs can develop these industries, and be leaders in the technology. This will allow so many of the remaining low-hanging developmental public health issues like safe running water to be dealt with. It is just an entirely different context, so we do have the past to look to, but it is an entirely different field of battle, as Cypher notes: “no nation can or should attempt to duplicate the success story of any other. Nations have been able to build on the accomplishments of other nations, often skipping over, and learning from, the arduous steps taken by path breaking nations” (383).
Works Cited
Cypher, J. M. (2014). The process of economic development. London: Routledge, Taylor & Francis Group.
