Review: “The Finance Curse: How Global Finance Is Making Us All Poorer” Nicholas Shaxson
Shaxson’s subheading – “how global finance is making us all poorer” – sums up this essential read perfectly. No other book will take you so clearly into the reality of today’s crazy global economy. Even experienced activists may be surprised to learn that the UK financial sector carries more responsibility for global villainy than American corporations. Finishing “The Finance Curse” I came to a novel conclusion “Oh, so Europe will be a much better place after Brexit”.
The book begins by revealing the financial complexity behind the everyday task of buying a train ticket in London. “Trainline.com Ltd runs the service but is owned by Trainline Holdings Limited. Five more companies up the chain, your booking fee crosses the English Channel to the British dependency and tax haven of Jersey, then back to London and back through five more companies and once more returns to Jersey, before migrating to two companies in Luxembourg, another tax haven.
And along the way, all sorts of other cashflows join our simple fee as different countries in this hierarchy borrow money from banks, or from each other, or inject and lend cash back and forth, sometimes at rates well above the market. From Luxembourg our brave little 75 pence enters a financial tunnel which is harder track, emerging in the Caribbean where it travels through three or four more impenetrable Cayman Islands companies.
There it joins a multitude of other financial streams from around the world to flow into KKR, a giant investment company in the United States. This river of money then flows into the accounts of KKR’s shareholders: the world’s biggest banks, investment funds and rich individuals.
KKR makes its money by re-engineering companies for profit, and if they haven’t gone bankrupt, selling them off. None of this is illegal: in fact, this is increasingly the way business is done. The first question is why – and the answer is found by understanding financialisation, which emerged in the 1970s and has slowly, silently, crept up on us all.
Trainline’s corporate structure is typical, where a business shifts its focus from the hard slog of boosting productivity and entrepreneurship, towards the more profitable sugar rush of financial manipulation to tease out higher profits for the owners. The purpose of financialised businesses has been whittled down to little more than a single-minded focus on maximising the wealth of shareholders.
Wealth Extraction, Not Wealth Creation
The second question is if all this complexity is efficient, and the answer is an unequivocal no. The financialisation of Trainline creates a hidden tax on British rail travellers. Corporate bosses, their consultant advisors, and the financial sector have moved decisively away from creating wealth for the economy, and towards extracting wealth from the economy. Financialisation has unleashed gushers of profits for the owners and bosses of these firms, while the underly economy – the place where most of us live and work – has stagnated. The profits, and the stagnation, are two sides of the same coin: wealth extraction.
This is a central part of what Shaxson calls the finance curse. “The concept is simple: it’s the idea that once a financial sector grows above an optimal size and beyond its useful roles, it begins to harm the country that hosts it.
Finance turns away from its traditional role servicing society and creating wealth, and toward often more profitable activities to extract wealth from other parts of the economy. It also becomes politically powerful, shaping laws and rules and even society to suit it. The results include lower economic growth, steeper inequality inefficient markets, damage to public services, worse corruption, the hollowing-out of alternative economic sectors, and widespread damage to democracy and society.”
The “finance curse” is a new twist on the now well-documented “resource curse”, where developing countries with rich natural resources actually underdeliver to their citizens due to the capture of local elites by global corporations, leading to their exclusive focus on extraction of easy wealth from the resource sector.
“It is no coincidence that the decline of British manufacturing since the 1970s has been so much faster than in other industrial economies, at the same time as Britain’s financial sector assets have grown so much larger as a share of the economy than in comparable Western nations. To compensate for this sluggishness, successive governments have filled the holes with policies of financial loosening, which has allowed bank credit to grow three times as fast as the underlying economy since the 1960s. And yet most of this credit has been circulating in the financial sector, unmoored, disconnected from the real economy and the people it is supposed to serve.”
Shaxson goes on to trace the rapid rise of finance-serving anti-state neoliberal economics, then the emergence of the competiveness agenda and its consultants, a race to the bottom where towns, regions and nations are portrayed as in competition to extract concessions which maximise profit extraction. He notes “companies nearly always decide where they want to relocate to before they start playing the states off against each other, but the consultants, who extract up to 30 per cent of the value of the subsidy package, have every incentive to deceive and exert undue pressure.”
London Leads The Way
A very telling story emerges as Britain’s colonies break away. In 1956 a new financial market began in the City of London. The Midland Bank began taking US dollar deposits unrelated to any commercial or trade deals. Under the Bretton Woods agreement, this was speculative activity and prohibited – but at the same time the Bank of England required reserves to defend the currency and Midland’s currency trades generated dollar fees, so the Bank of England looked the other way.
In effect, this meant a decision to host, but not regulate, a new market for dollars in London. American, Soviet and Chinese banks realised they could come to London and do things they weren’t allowed to do at home. The City had quietly turned Britain into an offshore tax and financial haven.
This is the beginning of a long and sad story where the City financial lobby continually expanded the envelope of legal financial manipulation and deception, resistance to regulation and accountability, and co-option of the political elite. For example:
“The twin oil price shocks of the 1970s accelerated the flows, generating giant new surges of petrodollars which the large banks recycled through the City of London back into disastrous, criminalised cycles of Third World lending. These loans were often looted by national elites through bogus development schemes or outright theft, and sent back for safekeeping into the same Euromarkets where nobody asked questions about the money’s origins.
Like a slow-motion nuclear explosion, the Euromarkets began to give financial globalisation a life force of its own. They metastasised beyond Britain, beyond dollars and beyond anyone’s control to become a frenzied battering ram, to smash holes in exchange controls and the cooperative international infrastructure. Major currencies were allowed to float against each other and the Bretton Woods architecture was rubble.”
And: “Crafting a national economic strategy that relies on offshore finance creates an inevitable blowback, which has criminalised Britain’s own elites in four main ways: it brings the wealthiest and most powerful into close proximity with criminals; it offers the elites permanent temptations to criminality; it makes criminals rich, enabling them to join the ranks of the elites; and by making it easy to escape rules and laws, it creates a culture of impunity and a real sense of being above the law.”
And critically, the finance sector’s argument that to remain nationally competitive, we should allow effective monopolies to dominate markets and undermine real competition: “Who killed anti-monopoly? There is a clear answer to this question. The Chicago School of economists developed the proposition that if mergers didn’t result in higher prices, what’s the problem? Laws should be subject to a sort of cost-benefit analysis. It doesn’t take a genius to see how elevating easy-to-massage numbers above the rule of law was likely to boost lawbreaking everywhere, not least in the financial system.”
Magnifying Systemic Risk
There is a particularly clear section on “repo”, which is now central to the plumbing of global finance. On face value, this is a way for corporations to deposit short term money, receiving collateral as security, with a contract for repurchase very soon for a tiny premium.
“Repo is everywhere now. It interconnects most financial markets in trillion-dollar webs of tightly coupled relationships, making repo a transmission mechanism for shocks. A corporation which receives a government bond in exchange for cash in a repo can pass that bond on to others in a second repo transaction. US rules restricted this practice, but Lehman (now failed) and others were able to do it without limit in London, with market players taking spreads and fees at each juncture. The longer the chain the greater the risks.
Legally, repo hinges on a question: is the transfer of cash for collateral a true sale? If so, then the asset that a bank “sells” in a repo is no longer the property of the bank, while the cash can be used to flatter the bank’s balance sheet. By now it won’t be hard to guess where Lehman went to find the opinion it wanted: the London law firm of Linklaters.”
There is so much more in this book. The dominance of financialised corporations in England’s aged-care sector makes sure that this globalised story comes closer to home through the personal stories of aged care workers. The documentation here on all the many ways finance extracts money is amazing: from small and large businesses, from taxes to tax havens, from government services to outsourcing, from regions into the centre, from developing to rich nations, from production to finance, through reinvestment in share buybacks into executive bonuses, and always from workers to the globally mobile ultra-rich, typically via trusts which hide their true wealth and avoid taxes.
Shaxson concludes: ‘The time for timidity has passed. It is no longer good enough to be a Facebook warrior, sending out messages to people who already agree with you. In today’s Britain, one of the greatest political divisions is between those who support financialisation and the finance curse, and those who want to return finance to its proper place, serving society. Which side are you on?’ Or as Financial Times columnist Rana Foroohar once asked pointedly: ‘Which country will be better able to control its moneyed elites?’ Read this book, reflect, then act now before its too late!