May 30, 2015 By Joseph P. Farrell

This very thought-provoking article was shared by "Mr. A.B.," who, shall we say, lives in one of those places known to be one of the world's great financial hubs. And I have to admit, I found the article not only confirming a number of my suspicions, but referencing an important article that may indicate the global financial oligarchies are doing a major "re-think" on global financial architecture. As prelude to this article, permit me to share my "suspicions". For a number of years, watching this financial circus that has been going on, more or less since just prior to the 2008 bailouts, but really (if we're honest), back to the Clinton administration, I came to the not terribly profound conclusion that there was increasing factional infighting within "the elite."  As the financial crises loomed, the infighting became more visible and pronounced - if one bothered to look. To this day, there are still people, however, who insist that all this is merely theater, that the omnicompetnt Mr. Globaloney is orchestrating all this for our benefit while his nefarious schemes for world domination march inelectuably forward.

Then came this link, which is referenced in the article that Mr. A.B. sent me:

Why does financial sector growth crowd out real economic growth?

You'll note immediately that this "working paper" is the product of that most elitist and oligarchical of elitist and oligarchical institutions, the Bank of International Settlements, brainchild of yesteryear's elitists, Montagu Norman of the Bank of England, and Dr. Hjalmar Schacht of Germany's Reichsbank. Norman, and particularly Schacht, were both early versions of Mr. Globaloney, believing in the power of finance capital to create a "community of interests" that would be powerful enough to avert war. At least, that was the line Herr Schacht used in getting powerful American interests to sign off on the creation of the bank, while he also was busily helping lay the foundations for German rearmament.

One paragraph toward the very beginning of this paper says it all:

The purpose of this paper is to examine why financial sector growth harms real growth. We begin by constructing a model in which financial and real growth interact, and then turn to empirical evidence. In our model, we first show how an exogenous increase in financial sector growth can reduce total factor productivity growth.This is a consequence of the fact that financial sector growth benefits disproportionately high collateral/low productivity projects. This mechanism reflects the fact that periods of high financial sector growth of ten coincide with the strong development in sectors like construction,where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low. (BIS: "Why Does Financial Sector Growth Crowd out Real Economic Growth?, p. 5)
The "pump-and-dump" model of the pre-bail-out period is right there: as financial sector growth boomed in the 1990s, fed by :"security bundles" based on mortgages, the housing boom grew with it, until prices fell, and the bottom fell out, and then, of course, came the revelations of mortgage fraud, "robo-signing", and everything else that went with it.
The conclusion to the BIS study is equally interesting:
In this paper, we study the real effects of financial sector growth and come to two important conclusions. First, the growth of a country's financial system is a drag on productivity growth. That is,higher growth in the financial sector reduces real growth. In other words, financial booms are not, in general, growth-enhancing, likely because the financial sector competes with the rest of the economy for resources. Second, using sectoral data, we examine the distributional nature of this effect and find that credit booms harm what we normally think of as the engines for growth – those that are more R&D- intensive. This evidence, together with recent experience during the financial crisis, leads us to conclude that there is a pressing need to reassess the relationship of finance and real growth in modern economic systems. (Emphasis added)
Now, before I comment on this last paragraph, let me share the original article "Mr. A.B." sent:
As noted in the article, the growth of finance capitalism at the expense of productivity, or, to give it perhaps a more accurate term, industrial capitalism, might have brought us to the point of "peak Wall Street," to the realization, among the "elite", that mere finance capitalism is a dead end: money must ultimately do something, it is a measure of "energy" in the system, and if all it is used for it to make more money for bankers, it ends up doing nothing, and choking the system. And one can sign all the free trade agreements in the world one wishes, and nothing will change this fact.
All this leads, however, to the creation of "surplus repression", when the "elites" create so much repression they begin to choke the very system which is the host to their activities:
Peter Phillips: We’re really happy to have you here. I’ve just finished reading your book, The American Deep State: Wall Street, Big Oil, and the Attack on U.S. DemocracyIn your new book you talk about the egalitarian mindset culture of America. We believe in the Constitution, the Bill of Rights, open government, transparency. And then you say also that there’s a dark side, or a deep side inside America that’s repressive, that is looking to be able to detain people without warrants, warrantless wire tapping and all of that – there’s a repressive side. Can you tell us a little bit more about how you frame this understanding of this culture of repression?

Peter Dale Scott: Actually, I think there’s always been a deep state in America and there have been times when it has been very repressive. We’re in a period of, you might say, surplus repression – repression that doesn’t serve anyone’s interests, not even the interests of the ruling class. (emphasis by CHS)
So why am I bothing you about all this?
Well, here comes my high octane speculation of the day: I think it is very significant and interesting that the BIS paper, which manages to state the obvious and make it look sophisticated by dressing it up in equations, has targeted the distinction between finance capitalism and industrial capitalism, and then called for a "reassessment" of their relationship. In other words, the BIS, in its own subtle BIS sort of way, is saying that the relationship itself has become inverted: finance capital should not dominate industrial capital, but the other way around. We get a measure of this inversion within the USA by recalling the subtle shift that occurred in political sloganeering. It used to be said that "What is good for Detroit is good for America." That phrase began to change during the Reagan era to "What is good for Wall Street is good for America." So what is the BIS really proposing? I suggest that one must always remember that, while being a truly international bank, the BIS's core interests and philosophy have always been "European," and if one looks at Europe, and in particular at Germany, the European "locomotive," one sees a philosophy of subsidized manufacture: i.e., Germany and the other large European economies never allowed their heavy tool and dye industries to be shipped overseas to cheaper labor markets in the name of "free trade". They recognized the national security needs (which took precedence over economic dogmas - Austrian, Keynesian, or otherwise), and acted accordingly.  It is, to be sure, a basically quasi-mercantilist "Fascist" viewpoint, one of "industrial Fascism" verses the "financial-capital" fascism that emerged in the USA.
By calling for a "reassessment" therefore, the real signal being sent from Europe to the rest of the world, and particularly to the BRICSA bloc, is that "we're with you," and not with the manufacturers of pretty papers and "security instruments" on Wall Street, and they might be signaling a willingness to create global regulatory structures to enshrine those sympathies. Granted, this is not the only way to read the situation, nor is it the only way to read the BIS paper. But I do think it does go a long way to rationalize the increasing signs of fissures within the western financial and alliance system.
See you on the flip side...