Table Of ContentThe Triple Crisis of Western Capitalism
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The Triple Crisis of Western
Capitalism
Democracy, Banking and Currency
Tillmann C. Lauk
© Tillmann C. Lauk 2014
Foreword © Alfredo Pastor 2014
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First published 2014 by
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Dedicated to democrats with
an independent mind
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Contents
Foreword xiii
Acknowledgements xx
Abbreviations xxi
1. Democracy 1
1.0 The conceptual starting point 1
1.0.1 The structure of this book 5
1.1 Lawmaking on the European level 5
1.2 Right to initiate legislation exclusively assigned
to the executive branch – the EU Commission 5
1.3 Exclusive assignment to initiate legislation to
the executive branch makes it vulnerable to the creation
of ‘special interest laws’ or to ‘structural corruption’ 6
1.4 ‘European Parliament’ – unequally elected and
excluded from legislation in key policy areas 9
1.5 Lawmaking process in ‘European Parliament’ is
dominated by executive branch – the ‘Conciliation
Committee’ 10
1.6 The missing ingredient in the elections for the ‘European
Parliament’ bringing a European democracy to life 11
1.7 Permanent initiation of legislation by the EU
Commission leads to undue centralization of power 13
1.8 On EU level the principle of subsidiarity is only paid
lip-service 14
1.9 Self-contradictory concessions to democratic principles
in the Lisbon Treaty 15
1.10 O ngoing perforation of the principle of sufficiently
specified conferral of power from national parliaments
to the EU 18
1.10.1 The ‘Lamfalussy Process’ 18
1.10.2 Project INDECT 19
1.11 T he quasi-plebiscite in Article 11, No. 4 of
the Lisbon Treaty is cynically designed 21
1.12 ‘ The United States of Europe’ – a democratic
impossibility 22
1.13 C ompetitive position of Europe not strengthened
by deeper integration 24
vii
viii Contents
1.14 A cartel of political parties dominates modern
mass democracies 26
1.15 The introduction of plebiscitary rights as a remedy 30
1.16 T he problem of the self-extinguishing forces inherent
in mass democracies 32
1.17 A possible way out of the dilemma of deficient
democratic legitimation 34
1.18 Chapter summary 37
2. Banking 42
2.0 When banking hurts society 42
2.1 Two sources of banking regulation: statutes
and the Basel rules 45
2.2 The fractional reserve banking principle – a hidden
subsidy 45
2.3 Consistent failure of fractional reserve banking
in history 47
2.4 Symbiosis between governments and banks 48
2.5 Can central banks sufficiently control the creation
of credit money through the commercial banking system? 50
2.5.1 The Great Depression 50
2.5.2 C auses of the Great Depression – academia
comes into play 54
2.5.3 Monetarists and Keynesians 54
2.5.4 Austrian School of Economics 58
2.5.5 Post-Keynesians 60
2.5.6 Conclusion as to the causes of the Great Depression 64
2.6 When economic ‘science’ hurts society – intellectually
flawed foundations of the neoclassical synthesis 65
2.6.1 Equilibrium dogma 67
2.6.2 Rational agent dogma 70
2.6.3 Efficient market dogma 72
2.6.4 Complexity theory 74
2.6.5 D isastrous influence of neoclassical thinking on
financial establishment – obsession with deregulation 78
2.6.6 W hy is neoclassical synthesis still dominant – despite
its disastrous failures? 82
2.7 Increasing fragility of the global banking system 87
2.7.1 Securitization 87
2.7.2 The global derivative complex 89
2.7.2A Regulated derivative trading 89
2.7.2B Unregulated derivative trading – OTC complex 90
2.7.2C Interest rate swaps 90
2.7.2D Credit default swaps 91
Contents ix
2.7.2E Collateral debt obligations (CDOs) 92
2.7.2F Perverse wealth creation – correlation strategy 93
2.7.2G The Magnetar hedge fund 93
2.7.2H OTC derivative complex – accident
waiting to happen 96
2.7.2I Questionable regulatory attempts – Central
Counter Party (CCP) concept 98
2.7.3 I ncreasing dependency on short-term financing
and on shadow banking 101
2.7.3A ECB stimulated short-term funding 101
2.7.3B Short-term financing in the US – shadow
banking sector 102
2.7.3C Repurchase agreements and rehypothecation 104
2.7.3D Size of the shadow banking sector 105
2.7.4 C onsistent failure of bank regulation – the Basel
Accords 105
2.7.4A Risk-weighted asset approach (RWA) –
susceptible to manipulation 105
2.7.4B Value at Risk (VaR) and the normal
distribution trap 106
2.7.4C Interconnectedness ignored – questionable
capital treatment rules 107
2.7.4D Basel III: insufficient capital provisions –
a loss scenario 108
2.7.4E Sovereign bonds treated as risk-free 112
2.7.4F Bank lobbyism against higher capital
ratios – hollow arguments 113
2.7.4G Why are banks pressing for low equity ratios? 115
2.7.4H Regulatory complexity – beyond effectiveness 116
2.7.5 H idden subsidies exceed profitability of global
TBTF banks 118
2.7.5A Traditional output measures overstate
economic contribution of financial sector 120
2.8 Role of the Fed and US Congress in responding
to the GFC during 2007 and 2010 123
2.8.1 P roblematic ownership and governance of
the Fed 124
2.8.2 How US Congress was led into the TARP legislation 125
2.8.3 A ccounting relief for TBTF banks – engineered
by Congress 125
2.8.4 S ecret bailout operations of the Fed in 2008–9 –
withholding information from lawmakers 126
2.8.5 The AIG bailout 127
2.8.6 The Fed and its various rescue programmes 129
