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Junk Economics and the Assault on the Middle Class

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"Behind every great fortune lies a great crime."
- Balzac

Capitalism hasn't failed. What has failed is the economic system in place today.

No amount of government taxes, trade barriers, or regulation caused it to fail. No investigative reporter, or congressional oversight committee, or regulatory watchdog, exposed the massive fraud and corruption in the financial system today. All of the safeguards put in place to protect the public, and the current system from itself, failed.

The global financial crisis came to light because what amounts to a falling out amongst thieves. They simply stopped trusting the ability of each other to pay their debts. Once lending stopped, credit creation froze, and the Ponzi scheme that parallels our financial system broke down.

2010-02-23-cabalchess.jpgThis so-called "Great Recession" isn't cyclical, and the problems are systemic. We didn't get here by accident. Choices were made by very wealthy and powerful people, and those choices can be reversed.

It's important to understand that we aren't fighting Adam Smith's Invisible Hand. We are fighting against the Money Trust.

The first thing that one must acknowledge is that we have just witnessed one of the most massive transfers of wealth, from the poor to the rich, in mankind's history. This enormous theft now threatens the very existence of the middle class in America. David DeGraw does an excellent job of adding it all up. Here are a few highlights:


50 million Americans now live in poverty
Half of all American children will need foodstamps at some point in their lives
Hunger rates are now at all-time highs
50 million citizens are now without health care
1.4 million filed for bankruptcy last year, 60% of them because of medical bills
13 million are expected to lose their homes before the crisis is over
Meanwhile, we incarcerate more people in the world than any other nation, and a new prison opens somewhere in America every week.

These are merely the highlights.

Make no mistake -- this trend was in place even before the financial crisis struck. In 1972 the CPI adjusted wages for the average worker was $738.48 per week. In January 2008 that figure was $598.18.

Simply put, the average American worker has been getting poorer for a long time. What's more, the past decade was the worst in 70 years, and we are looking at a permanent underclass of former workers.

The trend isn't limited to America. In 1970, 434 million people were suffering from malnutrition. That number is now 854 million. In 1820, the gap between the richest and poorest country was 3 to 1. Today it is 80 to 1.

On the other side of the coin, the wealthy have never had it better:

The richest 1% have seen their after-tax income triple since 1980 as a percentage of the nation's total income, while the bottom 90% have seen their share drop 20%
This trend accelerated since 2002.
The top 1% owns 70% of all financial assets, an all-time high
The average CEO makes 500 times the compensation that the average worker does. In 1970 it was only 25 to 1.
The top 400 richest have more wealth than 155 million Americans, and that gap is increasing

The list goes on and on...

2010-02-23-assistanceo.jpg

"The war against working people should be understood to be a real war.... Specifically in the U.S., which happens to have a highly class-conscious business class.... And they have long seen themselves as fighting a bitter class war, except they don't want anybody else to know about it."
-- Noam Chomsky

So what? Why should you care if our nation has less and less equality?

It's not a matter of class envy. Going all the way back to Aristotle, a strong middle class has been the most important part of a stable and just society. According to Seymour Lipset, and many other economists, a strong middle class is necessary for a stable democracy.

To put it another way, the decline of the working class in this country is a threat to our Constitutional form of government.

What does that mean? If you want a glimpse of the near future of America, look no further than Samson, Alabama.

Last March, Michael McLendon, a disgruntled worker from Pilgrim's Pride, a chicken processing company, went on a killing rampage that left 11 people dead. While a horrible tragedy in itself, the event was marked by something more unusual -- federal Army troops from nearby Fort Rucker were brought into Samson and other surrounding areas to patrol the streets. This fact was largely ignored by the major media.

The reason why the troops were manning traffic stops in the small Alabama town, in clear violation of the Posse Comitatus Act, was because the local sheriff asked for support from the military. The reason he couldn't handle the situation? Budget cuts in police enforcement.

What has this got to do with Michael McLendon and Pilgrim's Pride? In 2006, the giant chicken processor teamed up with Wall Street and borrowed hundreds of billions of dollars to acquire a rival company. To pay for the buyout, and the executive bonuses that came with it, it cut the wages of its workers. Soon after it found it couldn't pay for the debt and declared bankruptcy. This led to massive layoffs and devastation of the tax base of the community.

So who put together the deal that bankrupted Pilgrim's Pride? Lehman Brothers and Merrill Lynch. The Merrill banker who made the deal was recently hired by JP Morgan Chase. JP Morgan was behind the financial derivatives that has bankrupted Jefferson County, Alabama over a sewer project.

Because of the financial disaster regarding the sewer project, sewer charges were raised to more than double the national average. Poor, working residents are being forced to chose between water and heat. Cuts in the sheriff's office are so severe that plans are being made to call in the National Guard for any breakout in civil order.

If this sounds suspiciously like the scenario of a 3rd world nation, it only means that you are paying attention.

Junk Economics

"For if leisure and security were enjoyed by all alike, the great mass of human beings who are normally stupefied by poverty would become literate and would learn to think for themselves; and when once they had done this, they would sooner or later realize that the privileged minority had no function, and they would sweep it away. In the long run, a hierarchical society was only possible on a basis of poverty and ignorance."
-- George Orwell

Last November, Andy Haldane, the Head of the Bank of England, said that the state and the banking system was locked in a "doom loop", and that massive reforms were necessary to break out of it.

Since then there has been very little reforms on either side of the Atlantic.

The biggest obstacles to reforms are a) the false belief that we have a free market, and b) the false belief that there are no other alternatives. These perceptions have been carefully shaped by the Federal Reserve, and other central banks, over several decades.

First of all, the Federal Reserve virtually controls the field of economics today.

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.
...
"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it." - Upton SinclairAs Barry Ritholtz has pointed out, the field of economics today has become a joke.

Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.

No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else's 401ks in half. That is called criminal incompetence.

Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand.

It's hard to believe that a field of study could have drifted so far off course into obvious delusions...unless it was done intentionally. The fact that the wealthy elites have gained so much power and wealth from both the booms and busts of this unstable system is all the motive that you would need.

"The last duty of a central banker is to tell the public the truth."
- former Federal Reserve Vice Chairman, Alan Blinder

Albert Edwards, the chief strategist at Societe Generale, has flat out accused the Federal Reserve and Bank of England in complicity in robbing the middle classes of America and Britain.

While governments preside over economic policies which make the very rich even richer, national consumption needs to be boosted in some way to avoid underconsumption ending in outright deflation. In addition, the middle classes also need to be thrown a sop to disguise the fact they are not benefiting at all from economic growth. This is where central banks have played their pernicious part...

Now you might argue central banks had no alternative in the face of under-consumption. Or you might conclude there was a deliberate, unspoken collusion among policymakers to rob the middle classes of their rightful share of income growth by throwing them illusionary spending power based on asset price inflation. We will never know.

But it is clear in my mind that ordinary working people would not have tolerated these extreme redistributive policies had not the UK and US central banks played their supporting role.

To over-simplify things, the Federal Reserve has only one tool at its disposal: the printing press. The Fed cheapens money to stimulate the economy, but this encourages speculation, which leads to bubbles.

The moral is: Cheap money creates bubbles; and bubbles move wealth from workers to rich motherporkers. It's as simple as that. That's why the wealth gap is wider now than anytime since the Gilded Age.

Lately, the Federal Reserve has become much more open about its collusion with the financial elite. For examples, the Fed's efforts to cover up its role in the bailout of AIG, and its role involving the bankruptcy of Lehman Brothers.
The Big Picture

"A corporation cannot be ethical; its only responsibility is to turn a profit!"
-- Milton Friedman

One of the things missing from the economic discussion today is the lack of the perspective.

Wall Street has financialized the public domain to inaugurate a neo-feudal tollbooth economy while privatizing the government itself, headed by the Treasury and Federal Reserve. Left untouched is the story how industrial capitalism has succumbed to an insatiable and unsustainable finance capitalism, whose newest "final stage" seems to be a zero-sum game of casino capitalism based on derivative swaps and kindred hedge fund gambling innovations.

The failure of today's economists extend beyond the fact that they failed to anticipate the recession (as late as January 2008, most economists were predicting we would avoid a recession). Their real failure is that they don't even understand why the recession happened, despite the fact that the man on the street can grasp the idea once he is aware of the facts. It's that sort of failure that cannot be forgiven. My favorite contemporary economist with a historical perspective is Michael Hudson. His view of economists today is not complimentary.

the "intellectual engineering" that has turned the economics discipline into a public relations exercise for the rentier classes criticized by the classical economists: landlords, bankers and monopolists. It was largely to counter criticisms of their unearned income and wealth, after all, that the post-classical reaction aimed to limit the conceptual "toolbox" of economists to become so unrealistic, narrow-minded and self-serving to the status quo. It has ended up as an intellectual ploy to distract attention away from the financial and property dynamics that are polarizing our world between debtors and creditors, property owners and renters, while steering politics from democracy to oligarchy.

Economics today is not just a science without a purpose. Economics, as the professions now exists, is to science what Fox News is to the news media. Just like the purpose of Fox News is to misinform the public, the purpose of economics today is a PR con to justify inefficient and immoral policies that defend the status quo and keep mankind from advancing.

Manufacturing and industry, the great drivers of the American middle class for over 100 years, didn't die by accident. There was a deliberate decision made in the late 1970's to favor finance over industry.

We have arrived at this point because choices were made. One of those choices made by economists was to turn their backs on the moral values of classical economics. This was reflected by political ideology in a certain segment of society.

For instance, I noticed Glen Beck had this to say at the CPAC.

He then read disapprovingly the Theodore Roosevelt quote that "we grudge no man a fortune in civil life if it is honorably obtained and well used...so long as the gaining represents benefit to the community."

"Is this what the Republican Party stands for?" Beck demanded. He was answered with boos and cries of "no!"

It may seem ironic that a group well versed on religion, and supporting laws regulating practices that they consider immoral, would never consider extending their morality to the accumulation of great wealth and power. Their outrage appears limited to immoral acts that don't actually effect them. Why should honor and benefit to a person's community be excluded from the discussion of economics and moral behavior in general? Also, isn't this strange concept of separating honor and morality from economics at least part of the reason why we are in this situation?

"We're moving to an oligopolistic situation."
- Kenneth Guenther, Independent Community Bankers of America, 1999

It should be noted that the field of economics wasn't always like this. In fact, its original purpose was enhancing the human condition.

What have been lost are the Progressive Era's two great reforms. First, minimizing the economy's free lunch of unearned income (e.g., monopolistic privilege and privatization of the public domain in contrast to one's own labor and enterprise) by taxing absentee property rent and asset-price ("capital") gains, keeping natural monopolies in the public domain, and anti-trust regulation. The aim of progressive economic justice was to prevent exploitation - e.g., charging more than the technologically necessary costs of production and reasonable profits warranted.

A second Progressive Era aim was to steer the financial sector so as to fund capital formation...Today's bank credit has become decoupled from capital formation, taking the form mainly of mortgage credit (80%), and loans secured by corporate stock (for mergers, acquisitions and corporate raids) as well as for speculation. The effect is to spur asset-price inflation on credit, in ways that benefit the few at the expense of the economy at large.

The current economic system is sick. It's been poisoned with self-serving ideology from top to bottom. It's needs radical and systemic reforms, not tinkering within the current system (like those proposed so far).

This will not happen within the current political and economic system because the wealthy elite do not want it to happen.

However, the system was constructed by choices that were made. It can be changed in the same way the progressives changed it a century ago, but it requires a mass movement. It requires people to understand that their enemies aren't working people from other cities, nations, races, religions, or anyone who collects a paycheck. Their enemies are those of the powerful and wealthy elite who rigged the current system.

(Because I can't say it better)