Extractionism: Grand Larceny By The Banks

(2 pm. – promoted by ek hornbeck)

Cross posted from The Stars Hollow Gazette

Extractionism: taking money from others without creating anything of value; anything that produces economic growth or improves our lives.

MSNBC talk show host, Dylan Ratigan has a new book, Greedy Bastards, coming out in January and has been promoting the premise of the book, how the banks have shaken down taxpayers, in a series of on-line pod casts. He recently interviewed Yves Smith, author of ECONned and proprietress of naked capitalism, gave Dylan an education of how the banks have been extracting capital for themselves and why investors are afraid to take them to court for fear the government will retaliate.

Under an extractionist system, we find lose value at a faster rate over time, while we need to be creating it.  Instead of giving people incentives to make good deals where both sides can benefit, extractionist systems rewards those who take and take some more, and give nothing in return.  Sadly, extractionism has crept its way into every aspect of our economy – it’s everywhere, from trade to taxes to banking.

Let’s take a look at banking as an example.  As Yves Smith explains, financial firms do provide valuable services to our economy, like establishing stable and reliable methods of payment for goods and services, and selling bonds and stocks to help raise new money to fund big projects. There are more than that, of course, but those are two basic examples of valuable services that our banking and financial sector provides.

Now, let’s look at how they can also be extractive – almost always going back  the lack of transparency in the financial markets.

Yves identifies two main extractive techniques of our financial industry.  The first is charging too much for goods or services. “Even fairly sophisticated customers can’t know what the prices are of many of the products, so it’s difficult for them to do side-to-side comparisons,” says Yves.

The second method is producing products that are so complicated – like in the swaps market – that clients can’t see hidden risk in them.  “This has unfortunately become extremely common now that we have a lot more use of derivatives. Many of the formulas that are used they are disclosed by they are extremely complicated, and then on top of that, the risk models that are commonly used for evaluating the risk actually understate the risk,” says Yves.

(emphasis mine)

In the interview Yves makes suggestions how this can be fixed:

1. A small tax on all financial transactions.

2. Give financial institutions a bigger financial responsibility when they knowingly recommending bad products or dubious strategies.

3. We need increased political pressure for an effective and robust Securities and Exchange Commission.

4. More inspection of what the banks are doing in their over-the-counter businesses.

The full interview transcript is here.

Yes, we do need a Constitutional amendment to get money out of politics so this can be stopped.

h/t Yves Smith @ naked capitalism