Absentee Governance by the “Captains of Solvency”

By John Nicolarsen

Recent events surrounding the bill passed for the funding of the United States Government for most of 2015, especially viewed in light of the bailouts throughout the financial crisis, prompt this piece, a brief reminder of the prescience with which the contributions of Thorstein Veblen stand up to vividly contouring the “credit system” of his day and, I argue, of our times presently. In addition to Veblen we benefit in seeing the past and future rescue measures from the work of János Kornai, in re-affirming and slightly filling out the “social process” of the extents taken as a result of the “soft budget constraint” syndrome. [1]

For Veblen, the “effectual control of the economic situation, in business, industry, and civic life, rests on the control of credit.” [2] The extension and control of the “fabric of credit” in determining production and output and “what the market will bear” is undertaken by a “conscientious withdrawal of efficiency, as dictated by the law of balanced return,”[3] and “Balanced Return involves Balanced Unemployment.” [4]

Veblen referred to “investment bankers” as a class, along with other more colorful referents such as “Captains of Solvency,” “One Big Union of the Interests,” and “Guardians of the Vested Interests.” His “One Big Union of the Interests” is still the banking and credit apparatus of today, collectively:

“the community custodians of absentee ownership at large, the general staff in charge of the pursuit of business. And since the conduct of industry is incidental to the pursuit of business, the state of the industry and the rate, volume and balance of production also are dependent on their sagacity and goodwill. So that it is here, if anywhere, that responsibility for the country’s material welfare may be said to rest.” [5]

The absentee interests overseen by the investment banking class conspires in a “fiscal sabotage” in the “working-out of this absentee government of business and industry by this general staff of solvency.” [6] This, obviously, reflects the “revolving door” between D.C. and Wall Street, as well as, perhaps the City of London and other global financial centers. These are the corporate officers, nominated and confirmed public officials including Federal Reserve Board members, and other “Interests” who are “are unremittingly engaged in a routine of acquisition, in which they habitually reach their ends by a shrewd restriction of output; and yet they continue to be entrusted with the community’s industrial welfare, which calls for maximum production.” [7] As in Veblen’s day so too is it now that the “livelihood of the underlying population becomes, in the language of mathematics, a function of the state of mind of the investment bankers.” [8]

The maneuvers of this general staff are laid out by Veblen as well, in that “their strategy and general administration are necessarily of a negative, quiescent, sedative character, something in the way of a provisional veto power … a fiscal disallowance of such projects in business and industry as do not manifestly promote the advantage of those absentee interests that are taken care of by the given investment banker or group of bankers, in effect a species of fiscal sabotage.” [9]

As for the dynamics and general drift of income and wealth under the credit system, through the actions of the “custodians of credit,” greater expedition in taking over the assets of the business community will increase the:

“measure of control exercised by the keepers of credit over the conduct of industry at large. Eventually, therefore, the country’s assets should, at a progressively accelerated rate, gravitate into the ownership, or at least into the control, of the banking community at large; and within the banking community ownership and control should gravitate into the hands of the massive credit institution that stand at the fiscal center of all things.” [10]

Not to be flippant or in any way dismissive, but all of the sudden a “capital” in the 21st Century discussion seems slightly in need of further specification, offered here by Veblen. That is, the narrative regarding income and wealth distribution under capitalism as being due to a greater after tax return on capital than the economic growth rate (r>g) seems wanting somehow. The “masters of solvency” are, in effect, a factor of production, and every factor gets an income despite the difficulty in imputing “industrial productivity to those classes and employments which do not at the first view appear to be industrial at all.” [11]

The social costs of this class in protecting the power of the credit-interests and their guardians in the sabotage of production and the maintenance of the price system can be held as follows: “this free income which the community allows its kept classes in the way of returns on these vested rights and intangible assets is the price which the community is paying to the owners of this imponderable wealth for material damage greatly exceeding that amount.” [12]

At this point it is of benefit to bring in the work [13] of János Kornai in getting us to an appreciation that this massive social overhead is a process whereby the captains of solvency take increasingly larger risks with the knowledge that they will be bailed out should their gambles blow up. The “soft budget constraint” (SBC) syndrome is a recurring and intensifying phenomenon whereby the credit-interests bank on their dangerous practices being underwritten and they being rescued, i.e., “maintained” as solvent.

“Moral hazard” and the “F” word – fraud – as Dr. Bill Black of UMKC would remind us, is an apt description of the irresponsible and, criminal really, state of affairs under SBC syndrome. The use of a corporation as a weapon to not only restrict output, but moreover to hold society hostage and “on the hook” for the risks and costs of the rescue mark the syndrome and the “business principles” of today.

That the recent $1.1tn spending package required soft budget constraint policies written, literally, by Wall Street, as the prerequisite for passing government spending package is an obvious indication that what Veblen termed the “fiscal sabotage” of our “absentee government” by the “captains of solvency” is the current procedural means by which Washington is allowed to keep the lights on. The Federal Reserve, the executive and legislative branches, and Wall Street and their lobbyists simply cannot be viewed as separate interests, they are all “One Big Union of the Interests.”

Section 716 – the “Lincoln amendment” – had to be stripped for the absentee government to fund itself, and now the Federal Reserve has decided to delay implementation of the Volcker Rule for, essentially, two years. [14] Soft budget constraint policy making, on its face. Risky practices and risky products have been approved. With the “captains of solvency” legislating in this manner, it is “horses for courses” again for the financial sector. The “off-track” analog, risky financial “market making” products, are in play and the remaining inbred founding Wall Street sires that mastered solvency during the crisis are back to track. The jockey-pump Feds keyboard-currency operations go straight to the scoreboard, and then onto the taxpayer, output, and “Balanced Unemployment.”

Let us keep in mind what the “One Big Union of the Interests” did throughout the crisis. Sure, yes, they “allowed” Lehman Brothers to “become” insolvent, but over the course of the aftermath they effectively “declared” insolvency on thousands of banks and on millions of homeowners, resulting in foreclosures. That’s the record and the rule of law to which the masters of solvency abide. This proceeded and proceeds despite there not being a clear path to title in many instances. Grotesque. Vulgar. See, at the end of the day in the credit economy it is the subjective canon of solvency that rules the roost, not the rule of law. Determining who will have “soft budget constraint solvency,” is, of course, sin qua non under the credit system.

The other “solvency operations” during the financial crisis include the Fed lending, unsecured, to numerous European institutions, three rounds of Quantitative Easing plus a “Twist,” and the $29tn “pumping” operations [15] to special facilities which the Fed created, possibly illegally, under the then 13(3) section of the Federal Reserve Act.

The result of the Quantitative Easing solvency operations has been a stock market bubble and inflated asset prices (for those who own them), fueling further wealth inequality and unequal income distribution by means of the “unconventional” and extraordinary measures taken in the protection of the absentee owners, the “kept class,” as Veblen would offer. The stock market stands adrift from real production with corporations artificially inflating their stock with repurchases while parking millions offshore in avoiding corporate taxes. Sanctioned, in effect, by our absentee government’s tax policies.

Personally, I have always viewed the global financial crisis as the “Great Suggestion” and not the “Great Recession.” Veblen noted that “In the long run, so soon as the privation and chronic derangement which follows from this application of business principles has grown unduly irksome and becomes intolerable, there is due to come a sentimental revulsion and a muttering protest that ‘something will have to be done about it.'” [16] It is promising that certain senators are more than “muttering protest.” [17] The “Great Suggestion” was just a positive response and sentimental revulsion to the “privation” and “chronic derangement” inflicted by the “captains of solvency” on the global economy.

Terming events and the times as the “Great Suggestion” may accomplish a needed framing and re-posturing: it moves us from perhaps living solely as victims under the problems posed on us by the general staff of solvency to possibly getting on with and fighting for real solutions. If these last government funding, bill writing, and fiscal sabotage episodes by the “Guardians of the Vested Interests” don’t get us to an understanding of the dynamics in play we are doomed to underwriting the risks and explosions in the future, not to mention the conscientious withdrawal of efficiency and the restriction of output, employment, and industrial production directly administered by the credit-interests and investment banking class.

We need to take the events leading up to the financial crisis – arguably the last twenty-five to fifty years – and the recent measures taken by the “captains of solvency” in bailing out and now writing new soft budget constraint policies as the “Great Suggestion” and concentrate our efforts to putting in place real and productive activities and policies that directly result in employment and improved educational, infrastructure, and environmental outcomes and realities.

References

[1]    See, Kornai’s piece in the Financial Times here, to be touched upon below.

[2]   Veblen, Thorstein (1923: 398-9) Absentee Ownership. Business Enterprise in Recent Times: The Case of America. B.W. Huebsch, Inc., New York

[3]   Ibid., p. 394.

[4]   Ibid., p. 390.

[5]   Ibid., p. 340-1.

[6]   Ibid., p. 353.

[7]   Veblen, Thorstein (1919a: 40-41) The Engineers and the Price System. B.W. Huebsch, Inc., New York

[8]   Ibid. 2, p. 361.

[9]   Ibid., p. 353.

[10]   Ibid., p. 361-2

[11]   Veblen, Thorstein (1901: 198) “Industrial and Pecuniary Employments” Publications of the American Economic Association, 3rd Series, Vol. 2, No. 1 (Feb., 1901), pp. 190-235

[12]   Veblen, Thorstein (1919b: 106) The Vested Interests and the Common Man (“The Modern Point of View and the New Order”). B.W. Huebsch, Inc., New York

[13]   János Kornai, selected publications in English, here

[14]   See, David Dayen’s piece in the New Republic, here.

[15]   The extent of these “solvency operations” is perhaps best captured in working papers at the Levy Institute by Andy Felkerson (here), Nicola Matthews (here), and Dr. Randall Wray, here.

[16]   Ibid. 2, p. 424.

[17]   See, Senator Elizabeth Warren’s speech here.