Treasure Islands - Nicholas Shaxson [32]
Opponents of Barack Obama have claimed that his Keynesian attempts to resuscitate the U.S. economy through deficit-financed public works constitute a Soviet-styled takeover of the free enterprise system. Yet Keynes was never the socialist bogeyman of the conservative imagination. He loathed Marx and Engels, he saw government intervention as a temporary fix, and he believed passionately in markets and trade as the best routes to prosperity. He wanted to save capitalism, not bury it.
For much of the nineteenth century, free traders had dominated policy in the United States and much of Europe: It was self-evident, many people thought, that free trade delivered prosperity and brought peace by creating economic interdependencies that made it harder to wage war. It was a bit like an argument memorably made in the 1990s by journalist Thomas Friedman, who said that no two countries with a McDonald’s—that symbol of free trade and the “Washington Consensus”—had ever fought a war with each other.4 Keynes believed this, for a while. “I was brought up, like most Englishmen, to respect free trade,” he wrote in the Yale Review in 1933, “almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage.”5
He had begun to see then that finance is different. He learned of the irrationality of markets first hand, spending half an hour each day in bed speculating with his own money in the famously treacherous terrain of international currencies and commodities, diving into company balance sheets and statistics (and declaring of the latter discipline that “nothing except copulation is so enthralling”).6 It made him a fortune, though he nearly bankrupted himself when a gamble against the Deutschmark in 1920 went disastrously wrong. “When the capital development of a country becomes a by-product of the activities of a casino,” he famously said, “the job is likely to be ill-done.”
Keynes understood instinctively the important differences between trade and finance. When two parties trade goods with each other, it is more or less a meeting of equals. But with finance the borrower is usually subservient to the lender. It is a relationship described years later by James Carville, Bill Clinton’s adviser, who famously articulated the borrower’s sense of helplessness when he said that if reincarnated he wanted to come back as the bond market because then “you can intimidate everybody.” The interests of industrial capitalists and financial capitalists often conflict too. Financiers, for instance, tend to like high interest rates, from which they can derive considerable income, while industrialists want low interest rates, to curb their costs.
And the financiers then, as today, firmly had the upper hand. As is well known, the Great Depression that erupted in 1929 was the culmination of a long period of deregulation and economic freedom for Wall Street and a great bull market built on an orgy of debt, along with mind-bending rises in economic inequality. In the late throes of the boom the richest twenty-four thousand Americans, for example, received 630 times as much income on average as the poorest 6 million families7; and the top 1 percent of people received nearly a quarter of all the income—a proportion slightly greater than the inequalities suffered at the onset of the global crisis in 2007. “We have involved ourselves in a colossal muddle,” Keynes wrote in the 1930s, “having blundered in the control of a delicate machine, the working of which we do not understand.” The similarities with our current situation can hardly be missed.
Though there was no interconnected offshore system in his day—just the few assorted havens I described in the last chapter—Keynes still offered penetrating insights that help us understand the offshore system and are eerily prescient in light of the recent global financial and economic crisis.
When a company or government sells bonds or shares, investors hand over money in exchange for pieces of paper that give the holder title