Record Profits and Rising Authoritarianism

The Ascendancy of Finance Capital

By James Petras

03/31/06 "ICH" -- -- No sector of the US economy, in recent years, can match the rate and size of profit which have accrued to the biggest financial institutions. For the first quarter of February 2006, Goldman Sachs (GS) broke Wall Street records by reporting new profits of $2.48 billion dollars (annualized at over $10 billion dollars). Earnings were up 64% over the same period last year (which was also a very lucrative year). Return on equity rose to 38.8%, topping the record for a top investment house. Total revenues rose $10.3 billion dollars. GS has had record earnings in five of the past nine quarters (Financial Times (FT) 3/15/2006, p 1). Morgan Stanley reported a 17% increase in net income to $1.64 billion dollars for its first quarter in February 2006. Revenues rose by 24% compared to 19.7% last year. Lehman Brothers reported a 24% increase in profits in the first quarter to Feb. 2006 to a record $1.1 billion dollars. Revenues increased 17% to $4.5 billion dollars. Bear Stearns (BS) joined the dance of the billions of Wall Street, reporting first quarter profits of $514 million dollars; earnings were up 34% from the year earlier. BS new revenues grew 19% to $2.3 billion, while return on stockholders equity rose 20.1% in the first quarter of 2006. The combined profits of these 4 banks total $5.73 billion dollars for the quarter November 2005 – February 2006, or $22.9 billion annually – and that does not include the profits for three of the top 5 banks (Citigroup, JP Morgan and Merrill Lynch) whose quarter runs January to March 2006, which are expected to have equally high returns, doubling the new profits to over $12 billion dollars for the first quarter and increasing profits to nearly $50 billion for 2006.

No other sector of the economy can boast such high rates of return, nor can any top seven enterprises even approach the record profits. The banks draw their biggest profits in facilitating the concentration and centralization of capital (dubbed “mergers and acquisitions”), charging lucrative fees for “advising” and underwriting bonds to fund the mergers and acquisitions. The second source of profits is speculating, including debt trading, betting on global equity markets – especially in energy where Goldman and Morgan “have been making a fortune in recent quarters”.

While US consumers, demagogic politicians and anti-war activists have blamed the oil producing countries, they have entirely overlooked the big speculative banks in pushing up the price of oil.

The key political point is that the driving force of the most important economic sector – services – in the US is the financial sector, the one least engaged in productive activity, meaning production of goods and services for the population. Moreover its high profits, the astronomical bonuses and income of its leading elites, and its role in promoting the concentration of capital play a major role in increasing income inequalities. The costs they impose on enterprises for their “services” contribute to indebtedness which in turn leads to massive layoffs, reduction in health and pension benefits, as part of the “advisory” messages of the implicated banks.

In addition to their speculative activity, the banks have become significant equity holders in non-banking sectors. They play a major role in cutting labor costs as a route for maximizing short-term profits as the expense of long-term investments in research and technology. Finally the most lucrative and dynamic source of speculative profits is in overseas expansion, particularly in Europe and especially in Asia. For example, Lehman Brothers announced in mid-March 2006 an “aggressive expansion in Asia”. While overall revenues were up 17%, overseas revenues rose 30%, while Asian revenues rose by 67%. David Goldfarb, Chief Administrative Officer stated that Asian expansion was Lehman’s “number one priority”. All the major banks have or are in the process of securing beachheads in the banking sectors of China and India. Financial imperialism is becoming a major vehicle for market-driven empire building in the 21st Century.

Finance Capital: Political Power and Economic Policy

Financial capital wields enormous power over government economic policy through its direct representation in the controlling body of US monetary policy via the President and Executive Board of the Federal Reserve. The key explicit criteria for the appointment of the President of the Federal Reserve is the “confidence”, close ties and solid relations which the candidate has with Wall Street. The same criteria are applied to all the key economic appointees, including Treasury, Commerce, World Bank and International Monetary Fund. Long time Federal Reserve President Greenspan was highly respected and lauded not for his abysmal economic performance but for his favorable policies to Wall Street Bankers. Under Greenspan’s Presidency, the US economy de-industrialized, accumulated huge trade and budget deficits and went through two speculative bubbles (information technology and savings and loans). He presided over an economy which reached unprecedented levels of public debt – doubling in five years. Greenspan’s backing of Bush’s tax cuts for the rich (income, capital gains etc) contributed to the huge budget deficit and widening inequalities. His policy of low interest rates fueled the speculative bubbles at the expense of productive investments. His backing for unregulated capital (dubbed “globalization”) led to the re-location of US multi-nationals abroad (many of whom export to the US) and led to huge trade and balance of payment deficits. Yet all these policies which led to the disastrous state of the national economy, created extraordinarily favorable conditions for the domestic and international expansion of finance capital, as well as the concentration and centralization of banks into ten controlling units.

Wall Street’s impact on the economy and social structure can be best illustrated by examining New York City – its center of operation. The distribution of assets in New York City is among the most unequal in the world. Slightly over 1% of the population control over 80% of the assets – comparable to land inequalities in Guatemala and Brazil. Secondly, Wall Street is closely tied to real estate capital in New York, and both were instrumental in raising property values and rents, leading to the destruction of over 500,000 manufacturing jobs over the past three decades. Most of the former industrial properties were “redeveloped” to provide office space for finance related activities and high end housing for wealthy financiers. New York Senator Schumer, a notorious backer of Wall Street, leads the US in scapegoating China for the loss of manufacturing jobs, ignoring the essential role of finance – real estate in deliberately destroying the manufacturing sector in New York City. Of course, the demise of manufacturers in New York city was not only due to finance capital; the local garment capitalists and the trade unions were also partly responsible. The former relied on low-wage labor to compete – a losing proposition against China – instead of upgrading its technology, computerizing design and production and specializing in high-end products. The trade unions (International Ladies Garment Workers Union – ILGWU, later re-named UNITE) reinforced the failed cheap labor strategy of garment bosses, by discretely allowing de facto wages to fall below the minimum wage and what was stipulated in collective bargaining contracts. No doubt the ethnic-class differences between the six-figure salaried Jewish labor bosses and the low-paid Asian and Latino workers and the common class-ethnic positions of the labor bosses and the manufacturers facilitated these failed policies: loss of manufacturing competitiveness and loss of jobs for workers.

Finance Capital and the War in the Middle East

Finance capital was until recently predominantly made up of white Protestants and Jews. In the most recent period, Wall Street’s ethnic and religious base has broadened as corporate capital has taken over from family-owned banks. Nevertheless among the new generation of upwardly mobile speculators, there is a pronounced disproportion of individuals of Jewish origin, who are not necessarily religious or involved in Jewish or Israeli communal activities, fund raising or politics. Nevertheless a significant affluent minority of prominent Jewish banking and real estate millionaires are active in financing and promoting Israeli policy either directly or through the key pro-Israel lobbies like AIPAC and the President of the Major Jewish Organizations. These lobbies have been in the forefront of promoting the Iraq War, a boycott or military attack on Iran and the ethnic cleansing of Palestinians. The political muscle of this minority of Israel-First wealthy Jewish financiers is not countered by any countervailing organization by other Jewish financial bankers or for that matter by Gentile, Muslim or Hindu financial tycoons. Through the political use of their wealth, strategic location and high status, this minority of politically active financiers is in a position to establish the parameters and policies of Middle East policies vie their dominant role in funding political parties (especially the Democratic Party), candidates and congressional representative.

The Jewish and Gentile critics of the war deliberately exclude the role of the minority of wealthy Jews and their political lobbies in shaping US policy in the Middle East by focusing on the US and overseas oil companies (“No blood for oil!”). There is an abundance of evidence for the past 15 years that:

1. The oil companies did not promote a war policy

2. The wars have prejudiced their interests, operations and agreements with prominent Arab and Islamic regimes in the region

3. The interests of the oil companies have been sacrificed to the state interests of Israel

4. The power of financial capital via the pro-Israel lobbies exceeds that of the oil companies in shaping US Middle East policy.

A thorough search through the publications and lobbying activities of the oil industry and the pro-Israel lobbies over the past decade reveals an overwhelming amount of documentation demonstrating that the Jewish lobbies were far more pro-war than the oil industry. Moreover the public records of the oil industry demonstrate a high level of economic co-operation with all the Arab states and increasing market integration. In contrast the public pronouncements, publications and activities of the most economically powerful and influential pro-Israel Jewish lobbies were directed toward increasing US government hostility to the Arab countries, including maximum pressure in favor of the war in Iraq, a boycott or military attack on Iran and US backing for Israeli assassination and ethnic cleansing of Palestinians.

The most striking illustration of Jewish power in shaping US policy in the Middle East against the interest of Big Oil is demonstrated in US-Iran policy. As the Financial Times notes: “International oil companies are putting multi-billion dollar projects in Iran on hold, concerned about the diplomatic standoff (sic – US economic-military threats) over the country’s nuclear programme” (FT March 18/19, 2006 p.1). Despite the fact that billions of dollars in oil, gas and petro-chemical contracts are in play, the pro-Israel lobby has influenced Congress to bar all major US oil companies from investing in Iran. Through its all out campaign in the US Congress and Administration, the US-Jewish-Israeli lobby has created a war-like climate which now goes counter to the interests of all the world’s major oil companies including BP, the UK-based gas company, SASOL (South Africa, Royal Dutch Shell, Total of France and others.

The myth of “war for oil” is circulated by almost all the major progressive Jewish intellectuals and parroted by their Gentile followers, who are in word and deed prohibited from mentioning the AIPAC word in any public meetings or manifestos. The power of the minority of politically active Jewish financiers in the pro-Israel lobby is spreading far beyond the area of US foreign policy into the cultural, academic and economic life of the US. Three major events immediately come to mind.

In New York City, a major theater production of the life of Rachael Corrie, an American humanitarian volunteer murdered in the Occupied Territories by an Israeli Defense Force soldier driving a bulldozer, was cancelled because of Jewish pressure and financial threats. The theater admitted that the cancellation had to do with the “sensitivities” (and pocket book) of the issue to Israel-Firsters. The pro-Israel lobby’s defense and support of a minority opinion in favor of Middle East aggression is now extending its authoritarian reach into undermining the basic freedoms of American to free and open expression.

The second example of the growing tyranny of the pro-Israel minority over our civil liberties is the virulent campaign waged by all the major Jewish publications and pro-Israel organizations against a well-documented essay written by Professor Walt of Harvard University and Professor Mearsheimer of University of Chicago critical of the lobby’s influence on US Middle East policy. From the ultra-rightwing Orthodox Jewish Press (which claims to be the largest “independent” Jewish newspaper in the US), to the formerly Social Democratic Forward, to the Jewish Weekly , all have launched together with all the major Jewish organizations, a propaganda campaign of defamation (“the new Protocols of Zion”, “anti-Semitic”, “sources from Neo-Nazi websites…”) and pressure for their purge from academia. The Jewish authoritartians have already partially succeeded. Their press releases have been published by the mass media without allowing for rebuttal by the academics under attack. Harvard University has demanded the identification of the Harvard Kennedy School be removed from the paper. The financier of the professorial chair (in his name) which Professor Walt, as academic dean, occupies at the Harvard Kennedy School, is no longer mentioned it in his publication. Ultra-Zionist Professor Dershowitz and his fellow Harvard zealots call into question their moral and academic qualification to teach. Both in the United States and France, legislation is being prepared to equate anti-Zionism with anti-Semitism and to criminalize as a ‘hate crime’ the free expression of outrage over Israeli atrocities and any criticism of the Lobby’s control of US Middle East policy. In the US, the proposed legislation would take the form of withdrawing federal funding from any academic institution where the policies of Israel are criticized. As yet there is no organized opposition in the US by Jewish or Gentile academics or journalists to this erosion of free expression or a defense of the integrity of the two critics of the Lobby. There is no group of Jewish investors or financiers willing to fund a civil rights campaign in defense of free speech, academic and artistic freedom, to counter the minority Zionist financial elite. It is business as usual.

Some Myths and a Few Insights: Capitalism and War

In addition to the myth of the “war for oil” there are several facile misconceptions:

Myth 1) - the dominance of financial capital leads to war: There is no evidence that financial capital performs better under war time conditions than in peace. In fact recent history demonstrates that ‘crisis’ provokes market volatility and sudden disruption which prejudices important financial ‘bets’ even as other benefits. Most of financial profits accrue from mergers and acquisitions with tend to increase due to competitive market conditions – not wars. The financiers who support war do so for their own personal-ideological reasons, ethnic identification and usually do so via ethnic-affiliated organizations not through financial associations. Thus the big contributions by a minority of Jewish financiers to the pro-war Zionist lobbies have less to do with their class affiliation and more to do with their identification with Israel First organizations.

Myth 2) – While financiers are a major funding source for the bellicose pro-Israel lobbies and their congressional spokespeople, they are a minority among Jewish investment bankers, whose prime concern is maximizing the earnings of their banks and hence their incomes, and engaging in many non-Jewish social cultural and professional activities. Over half do not even marry within the Jewish community.

Myth 3) - Many writers cite polls which suggest that most Jews, like other Americans now oppose the Iraq war. The fact remains however that they are not willing to criticize the pro-war Jewish lobby or to mention Israel’s involvement in precipitating the war through its occupation of Palestine.

Myth 4) – The pro-Israel lobby is just like many other lobbies. The Jewish pro-Israel lobby is uniquely powerful because it commands a vast network of grass roots organizations,150 full-time functionaries in Washington operating under discipline and commitment to a foreign power, Israel. Moreover the lobby is financed by wealthy individuals in highly lucrative growth sectors (such as in the banking sector). Thirdly its long established reputation of threats and rewards to recalcitrant and to loyal Congress people, executives and opinion makers makes it an extraordinary and dangerous lobby.

Conclusion

The ascendancy of finance capital and its influence over US economic policy has had major, largely negative, consequences for the US economy, especially our living standards, external accounts and budget. The deregulated financial markets have led to record profits for Wall Street but it has also led to a series of speculative bubbles, which have bankrupted millions of retail investors.

The loss of US industrial competitiveness is largely the result of the transfer of capital from productive innovations which increase competitiveness to speculative activity several times removed from the actual production of goods and services. “Derivative” and “Hedge funds” now equal the size of the US economy at $12 trillion dollars…a financial collapse waiting to happen. Financial capital in its most advanced stage of derivatives is based on bets on bets on bets…which has vastly increased the likelihood of economic collapse even as it widens the chasm between bankers and wage earners.

The political power of finance capital has been exercised in the realm of economic policy and executive appointments; it has not been directly involved in formulating or benefiting from the war policies. However it has been compatible, supportive and benefited from its close ties and relations with the militarist policy elite in Congress and the Executive. The relation is mutually supportive. The Executive deregulates financial markets, lowers taxes, cuts social spending, appoints Wall Street friendly Federal Reserve Presidents, and in exchange Wall Street supports the imperial war ministers in the Cabinet and in Congress.

Investment banks have been deeply involved in recycling Arab petroleum funds and engaging in large-scale mergers and acquisitions in the Middle East, while a minority but deeply engaged Jewish financiers have funded the pro-Israel lobbies pushing for a more bellicose US policy toward the Arab and Islamic world.

Wall Street’s position on the erosion of democratic freedoms has ranged from ambiguous to authoritarian. While backing the Administration’s Patriot Act, they opposed the blocking of Dubai’s purchase of US port terminal management. While an active minority backed the banning of the Rachael Corrie theater production and funds pro-Israel organizations attempting to purge academics critical of Israel, the majority look on with indifference.

Rising authoritarianism and lucrative financial profiteering are compatible with the ascendancy of finance capital.

James Petras, a former Professor of Sociology at Binghamton University, New York, owns a 50 year membership in the class struggle, is an adviser to the landless and jobless in brazil and argentina and is co-author of Globalization Unmasked (Zed). His new book with Henry Veltmeyer, Social Movements and the State: Brazil, Ecuador, Bolivia and Argentina, will be published in October 2005. He can be reached at: jpetras@binghamton.edu