Understanding Financial Capitalism

“The operations of banking and finance were concealed, scattered, and abstract so that they appeared to many to be difficult. To add to this, bankers themselves did everything they could to make their activities more secret and more esoteric. Their activities were reflected in mysterious marks in ledgers which were never opened to the curious outsider.”—Carroll Quigley 

Banks have never been outspoken about their methods because the average citizen would find them offensive. In this article I’m going to list some of the basic financial mechanisms used in our present system.

At the core of the financial capitalist system lie a few clever tricks and devious institutions. The first of which is the power to create money. Perhaps the simplest and most truthful explanation of this is that a bank can loan out about ten times as much money as they hold in their reserves (in England it’s twenty times the amount). This is just the perpetuation of a trick learned by early banks and goldsmiths who discovered that they could write many more paper notes for gold than the actual gold they contained in their vaults. Nowadays it’s done by banks loaning money back and forth to each other, essentially creating money for themselves out of nothing.

One cannot underestimate the advantage gained by this power. Five percent gains become fifty. Double your money, and it’s a thousand percent gain. Add in compound interest and the inevitable result is the gradual ownership of everything purchasable by money. And the things purchasable by money continue to expand. Not so long ago the average citizen was a farmer who grew his own food and money was of secondary interest to him. Things couldn’t have changed more. Now nearly half the people in America work for publicly traded companies.

Which leads us to financial capitalism’s second clever trickWall Street. To be clear, banks don’t just have the power to give out loans. Investment banks can buy and sell securities in the stock market. This basically gives them the power to buy almost anything either directly, or indirectly through corporations. This includes: companies, raw materials, land, media, military contractors, creative and intellectual property, and (especially) human resources; everything bought for about a tenth of its cost. As the investment banks purchase more stock, they gain control of companies and find themselves holding the marionette strings of a huge percent of the workers in America. 

This probably looks unfair to many. However, the skeptical reader might argue, “that’s just like buying on margin. The potential for profits are exaggerated, but so is the potential for losses.” Another might continue, “if there is such an advantage to be gained from banking, why doesn’t everyone do it?” Of course these skeptics would be right—unless there was a way to enforce a cartel, manipulate markets, and provide a safety net for losses. And this is where the third advantage, the Federal Reserve Banking System, comes into play.

The Federal Reserve Banks are composed of a coalition of representatives chosen from banks. Are the representatives chosen by the government? No. They’re chosen by private financial head-hunting firms. This is important because the Federal Reserve holds key powers that are not popularly known. The first key power the Fed has is bank licensing, effectively making the banking industry a cartel. It’s quite difficult to become licensed which is no surprise—would you want to allow more competition in your industry? The difficulty of becoming licensed has increased over time, and financial crises are used as excuses to heighten control over the cartel.

The second key power is the responsibility of auditing banks. Have you ever wondered why you so often hear of lax enforcement of financial regulations during periods of financial crisis? This is probably because the Federal Reserve is composed of representatives from financial institutions, so they are in essence auditing themselves.

Moreover, they can easily meet reserve requirements from the third power of the Federal Reserve: unlimited lending. 

“Commercial banks borrow from the Federal Reserve System (FRS) primarily to meet reserve requirements before the end of the business day when their cash on hand is low. Borrowing from the Fed allows banks to get themselves back over the minimum reserve threshold. A bank borrows money from the government’s central bank utilizing what is known as the discount window. Borrowing via the discount window is convenient because it’s always available. The process includes no negotiation or extensive documentation. The downside, however, is the discount rate—the interest rate at which the Federal Reserve lends to banks—is higher than if borrowing from another bank.”—Investopedia

Therefore, our fractional reserve banking system is not like buying on margin because there is no “margin call”.

Market Manipulation 

The most widely known power of the Federal Reserve is the control of interest rates. The control of this rate is currently used to direct the economy. Although the Fed Chairman is “chosen” by the president, he can’t just choose anyone he wants. He must choose from a small group of Fed members, and there have been some serious disagreements between presidents and Federal Reserve Chairmen about fiscal policy including an infamous episode where Lyndon Johnson physically assaulted Fed Chairman William McChesney Martin, shoving him around his Texas ranch living room and yelling in his face, “Boys are dying in Vietnam, and Bill Martin doesn’t care.”

Obviously, this power to direct the economy (and especially stock prices) gives a tremendous power to the Federal Reserve. Although the Federal Reserve Board is supposed to be in control for the benefit of the economy, the Fed’s goals aren’t clearly stated, such that one Chairman says he’s solely trying to control prices, and another tries to stimulate the economy. This lack of a clear goal gives them free reign to do whatever they want. It’s up to us to trust that they won’t act against the country’s interests in favor of their own, or whisper secrets in one another’s ears. Presently, the discount rate has been lowered time after time and it currently stands at 0.25%, making your savings account worth nearly nothing to banks (they can just borrow money from the Fed instead of using yours).

Market manipulation doesn’t end at the Federal Reserve level. The American public has recently been made aware of market manipulation prominent in hedge funds from the widely publicized GameStop scandal. Manipulation related to hedge funds is likely to occur often because there is so much money in these types of derivative markets relative to the stock market, so it is financially worthwhile to press the value of stocks down or up to win on hedge bets. Want to join in those investments? Sorry, “financial regulators generally restrict hedge fund marketing except to institutional investors, high net worth individuals and others who are considered sufficiently sophisticated.” (Wikipedia) And apparently they also make rules on the fly against the “common man” undermining and profiting from their strategies.

So What?

But society has always had its rulers. Is it fair that a prince should become a king just for being born to the right people? Why should we be upset if a global financial elite has usurped power from our nations? I will address this question in my next article about the influence of financial capitalism on culture.