Very few industries are as blatantly anti-customer as the financial services industry. And for good reason.
Basically, the financial service industry is bi-furcated into two very separate operations that, when they work together, are anti-consumer, while simultaneously being pro-banking and pro-corporate.
In everyday life, too many individual investors are routinely victimized by financial professionals who have an inherent conflict-of-interest in providing investment advice, while simultaneously selling financial products.
At the same time, many of these same global banking-investment firms provide retail investment advice and products (mutual funds, separately managed accounts, mortgages, estate planning, 401(k) products and plan administration, and back office support, including global custody), that often elevate profits above suitability. Worse, these webs of services are so intertwined that any discussion of transparency to the people who are providing the investment cash (the end-investor) are often ignored once the initial investment checks are deposited into the firm’s trading accounts.
“If you are an investor, financial professional or financial journalist and do not know about neoliberalism, you have a huge gap in your professional knowledge.”
While too-big-too-fail banks, Glass-Steagall, the Volker Rule and the fiduciary obligation are involved banking industry policies and concepts that have been debated for years, global banks are often not examined from a doctrinaire and policy perspective that would make many of these isolated debates, as well as the global financial crises and price fixing scandals in foreign exchange and the LIBOR interest rate, into a sharper focus.
The key to focusing this often wide-ranging discussion is looking at the U.S. global banking and investment services industries from the doctrine of neo-conservatism, a political philosophy which is not very familiar to too many financial service industries professionals, yet it’s the dominant philosophy which has shaped their everyday business practices since the 1970s.
Discussing the basics of any political doctrine is considered dry and boring, but no other political theory has so formatively shaped applied capitalism since Adam Smith (1723-1790).
The problem is that for the past 30 years, neo-conservatism has been the driving force shaping every aspect of the modern the financial services industry. Without putting the financial service industry into its current, historic framework, it’s impossible to understand the policy forces shaping the industry’s regulatory debate, everyday financial operational practices, while simultaneously explaining how individual investors are victimized as they try to pursue a more secure financial future.
Without even being aware of or understanding the basics of the neo-conservative doctrine, financial professionals, the media and individual investors are blind to the greatest policy force shaping current everyday investment industry behavior and its impact on unsuspecting individual investors.
Among other large social and economic developments, the ascent of this doctrine also explains why:
• Financial reform have become so confrontational and blunted, even as investors suffer through preventable recessions and periodic wealth destructions;
• The rise in societal income disparities (the top 1% versus everyone else);
• Why the fiduciary debate is likely to fail;
• Why global price fixing scandals persist even as the perpetuators of these frauds escape prosecution;
• The current economic breakdown in Greece and the ascent of the World Bank, Bank for International Settlement, United Nations, and International Monetary Fund;
• The rise of “big data” and perma-temps in the workplace;
• The fetish for monetization, privatization, technology, and the push to destroy unions and pensions.
• The domination of too-big-to-fail banks and subsequent bailouts of financial meltdown ranging from Long-Term Capital Management to global banks.
Why is this happening and what does it indicate about the future of the financial services industry?
The Basics of Neo-Conservatism
The confluence of major historic events from 1978-1980 launched the forces which created neoconservatism. As described by David Harvey in A Brief History of Neoliberalism (Oxford University Press, 2005), this doctrine originally believed a state-run, market-oriented companies and democratic institutions could create a new stable peaceful, inclusive political structure.
Historically, strong post-WW II economic growth in many advanced nations in the Fifties and Sixties propelled the expansion of the middle class and global development. The problem was that much of the Third World was left behind. But by the end of the 1960s and 1970s, these economic advances slowed or were derailed. Inflation, strikes, the demise of fixed exchange rates accelerated this breakdown. Socialist movements gained momentum from labor, student and urban movements in many advanced capitalist countries, primarily in Europe and South America. This posed a serious political problem to the parties in power and the upper classes. But what would take its place?
Neoconservativism emerged as a powerful, alternative political philosophy, but it also produced some dramatic economic changes, such as grossly unequal income distributions, largely due to forced privatization, wherever neoconservative government policies were enacted.
But that is in theory. In reality, neoconservative policies created wide income disparities, reduced the role of unions, and promoted unfettered consumerism. But to mask the special benefits that accrue to the financial class and a few well-placed financial beneficiaries, neoliberalism was pitched as a doctrine that expanded individual liberties and unfettered entrepreneurship. Hence the popularity of social billboards, such as “Shark Tank,” Silicon Valley entrepreneurs, hedge fund managers, and the anti-regulation mantra aimed at all governmental levels.
In the U.S., the first large test of neoconservative policies occurred during the fiscal problems of New York City
during the 1970s. At about this same time, President Reagan first applied neoconservative policies in the U.S. in his effort to break trade union activism by firing the air traffic controller’s union in 1981. Anti-union sentiment continues today, including the current effort to privatize the U.S. Postal Service by forcing it to fully fund health care benefits for its 200,000 union members, a financial burden no other private corporation in the U.S. is forced to meet for either its pension or health care beneficiaries.
But there was more. In the U.S. during the 1970s, the top 1% of people earning an income controlled 15% of the total national income. This ratio has greatly expanded since then. The top 0.1% of U.S. income earners increased their share of the nation income from 2% in 1978 to more than 6% by 1999. Meanwhile, the income ratio between workers and CEOs went from 30:1 in 1970 to 500:1 by 2000. Tax reforms from the Bush administration increased this gap. Outside of the U.S., similar scenarios unfolded. In the UK, which also went through a privatization frenzy, the top 1% of salary earners doubled their share of the national income by 1982. Similar income disparities between the classes also emerged in Russia, Chile and Mexico.
But there was also an economic and, in some cases, a military aspect to neoconservativism that emerged. For example, the U.S. moved against popularly elected governments, such as in Chile, in order to establish this new policy. The first example of neoconservatism in action was applied in Mexico during their default crisis in 1982-1984. What transpired there was applied to other nations in the next decade with very similar results.
Today, the economic version of the neoconservative doctrine is being applied to Greece and its push by the European Union and global banking institutions, to force the nation to repay its creditors before it honors pension, social and health care obligations to its own citizens. In a BBC interview today (June 29, 2015), one Greek politicians said that this neocon doctrine was being used to overthrow a democratically-elected leftist government in Greece and to force the country into financial servitude. Similar complaints have been made by elected officials in Jamaica and Haiti.
Meanwhile, in established democracies, such as the U.S. and UK, neoconservatism has been sold to the electorate as a form of “common sense,” albeit with its own special twists. The philosophy itself is now popular in universities, corporations, the financial media and think tanks. Institutions, such as the U.S. Chamber of Commerce (the engine behind the secretive Trans-Pacific Partnership Treaty and other anti-consumer legislation), the Heritage Foundation, financial industry lobbyists, the National Bureau of Economic Research, American Enterprise Association, and conservative foundations (Olin, Scaife, and Pew Charitable Trust) have all developed and promoted campaigns, books and even a TV series, addressing the neoliberal agenda for the public and other corporations.
(To see a chilling display of neocon economic vengeance in a panel discussion, view this video clip from the American Enterprise Institute that addresses proposed punitive remedies from the global banks and IMF on Puerto Rico and Greece.)
The progressive and politically left institutions and media have been largely ineffective in combating this propaganda.
Today, there are three main forces which helped restore class power through neoconservatism. These are:
1. Increased use of active financing (VC, private equity, investment banking), foreign direct investment, deregulation and innovation in the financial markets.
2. The breakdown in trade barriers, exchange controls standardized trade agreements and more open capital flows.
3. Using the IMF, U.S. Treasury and Wall Street banks to pressure developing countries into adopting neoliberal reforms (as seen in the current economic breakdown in Greece.)
So what alternatives exist for investors and financial professionals, including financial journalists, to the instability of the neocon state?
Since neoconservative philosophy is based on corporate power, class distinction, private enterprise and an emphasis on maintaining order against riotous individual interests, and the emphasis on the military, liberal policies should emphasize the failures of neoliberalism in action.
In short, these deficiencies will emerge in the upcoming presidential discussions between Democrats and Republicans, who have overwhelmingly, and unquestionably embraced neoconservatism and its reverence for the corporate state.
Investors and financial professionals, meanwhile, can either study the role of neoconservatism for short- and long-term trading strategies, or better yet, they can identify these deficiencies and try to correct them their everyday advisory practices and as citizens in a democratic society. But what is clear is that a corporate society is politically and economically unstable, and certainly no place to build wealth and social equality and social security.
Additional Sources on Neoconservatism
A Brief History of Neoliberalism, David Harvey, Oxford University Press, 2005
Global Finance: New Thinking on Regulating Capital Markets, Zed Books, 2000
Profits Over People: Neoliberalism & Global Order, Noam Chomsky, Seven Stories Press
Roots of the Neoliberal Revolution, Harvard University Press, 2004
The Condition of Postmodernity, D. Harvey, Oxford University Press, 1989
“Neoliberalism: Origins, Theory, Definition,” http://web.inter.nl.net/users/Paul.Treanor/neoliberalism.html
How 401(k) Fees Destroy Wealth, Chuck Epstein, Amazon Books, 2012