The Destructive Rise of Big Finance
Economic, financial and regulatory issues should dominate politics and government in the United States for the next two or three years, which is important enough. National discourse may also have a new and deserving bogeyman. Franklin D. Roosevelt had Big Business, Ronald Reagan had Big Labor, and my guess is that the new president inaugurated next January will have Big Finance.
True, finance has been whupped by presidents before. Thomas Jefferson and Andrew Jackson, for example. But that was in the quill-pen era when the financial sector was a pup. Today's financial services sector, by contrast, is a grasping, gargantuan combination of banks, stockbrokers, insurancemen, loan sharks, credit-card issuers, hedge fund speculators, securitization mavens and mortgage operators. Over the last five years, financial services has reached a swollen 20-21% of U.S. GDP -- the largest sector of the private economy.
Manufacturing led financial services by 2:1 back in the 1970s, but by 2006 beaten goods production had shrunk to just 12% of GDP.
Do most Americans understand this? Of course not. Newspaper front pages have shunned any discussion; 60 Minutes has not even spared the transformation sixty seconds, despite its vast implications. This upheaval is probably "the greatest story never told" about the two decades between, say, 1986 and 2006.
Nor was it an economic accident. Computerization was a prequisite, as was the rise of financial mathematics. However, I would say that the two most important underpinnings of financialization lay in the rise of public and private debt as a mainstay of American culture and economics and the perpetual liquidity and bail-out support of the Federal Reserve Board under Alan Greenspan. During Greenspan's 1987-2005 tenure, the sum of public and private debt in the United States quadrupled from just over $10 trillion to $43 trillion. Finance became the industry that was not allowed to fail but was permitted to enlarge and metastasize its behavior almost at will. Regulation was minimal. Favoritism was omnipresent.
The result, alas, has been all over recent headlines. America's biggest ever housing bubble, with 57 varieties of exotic mortgages and home prices now plummeting at rates unseen since the 1930s. The United States turned Credit Card Nation, with a citzenry in thrall to plastic, 20% interest rates and late fees for just about everything. Huge banks like Citigroup feel no shame in paying billion-dollar fines for colluding with Enron's tax and accounting deceits. And since mid-2007, national and world credit markets have been panicked and paralyzed by hitherto obscure instruments -- the stand-outs are collateralized debt obligations (CDOs) -- that not even their designers and packagers can explain.
Adolescent versions of Frankenstein finance became a crash and a disaster for Americans in 1929 when the industry was new and represented only 10-15% of the economic weight of American manufacturing. Now, by contrast, the unraveling of a second financial sector-turned casino involves literally the biggest force in the American economy. Who knows how much of this hubris and malfeasance is going to unwind unpleasantly or how long that will take?
In fact, phony Washington statistics and warped market measurements make it doubly hard to tell. The federal Consumer Price Index is already regarded by many Americans as a con job, and the press periodically quotes investors who state their belief that current U.S. inflation is really 6 to 9 percent a year, not the 2-4 percent the government alleges. I agree. On top of which, because the value of the dollar has dropped so far, the Dow Jones Industrial Average at the end of March was not really 12,200, a number barely up from its 11,700 peak in 2000. If you measure the Dow in Swiss francs or euros, two strong currencies, it has already lost some forty percent of its 2000 value. Too many Americans live in a dream-world of economic misinformation.
I began writing about these matters with a 1990 book entitled The Politics of Rich and Poor, and in several other volumes since then. Today, the economic negligence of Washington and Wall Street, more than two decades in the making, has led to a multi-dimensional crisis in which this country faces an unprecedented convergence of problems: unprecedented debt, tumbling home prices, reckless money supply expansion, growing inflation, insufficient and expensive oil, and an eroding dollar. Sadly, there may no longer be a plausible way out.
Kevin Phillips' new book, Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, is being published in April by Viking.
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Count me as one of the believers that inflation is closer to ten percent than the government figures. I tried to figure out how with the increase in food and gas which seem to go up 25% a year at a minimum the inflation was around 2%. I learned that there is nice trick to it all. For instance, if today you spend $1000 to buy a computer with a 2 G hard drive and 1 G memory, the Feds figure the same computer would have cost you $2000 three years ago therefore as far as computers (and all the gadgets) go the cost of inflation is going down. You add things like that into the pot and you get very little inflation.
The only problem is that we buy gas and food every day while we may buy a new computer every few years or maybe never at all. So we lose on a daily basis but once in a while we some buy those devices that keeps going down (not in price but in the sense you get more for your falling dollar) and that savings is added into our costs and low and behold no inflation.
I must say the American idea of savings though has proven itself correct. It is better to keep spending and not saving because with the dropping dollar and steady inflation any money saved is going down in value especially now when you get less than 1% for your money.
I also believe that inflation has been understated for many years, and when the exponential effects are finally taken into consideration, the final tally will be seen as a significant degradation in the buying power of the working population.
I like your mention of Moore's law. The result there is even more interesting than the rest of the inflation picture. (I am a software developer...) Since the beginning of my career 30 years ago, the economics of computing have changed dramatically: The human part, such as IT folks, developers and other contributors are now, by many orders of magnitude, a much much more expensive part of the computing ecosystem than before. This has resulted in the strangeness of a continued strong need for developers, while simultaneously placing them under great stress to maximize productivity per dollar.
So the only "growth industry" we have right now still places a very strong downward pressure on the income-earning ability of its participants.
You've told a number of truths here that I rarely see even though these truths are metaphorically the 600-lb gorillas in the economy. I especially refer to your mention of America's loss of manufacturing and that the "core inflation rate" is a con.
Please keep tilting at the windmills - someday people may listen.
Incidentally, I mostly disagree with you politically but I've long respected you as a person who has courage and his eyes open enough to see what's going on.
We create reality from what we choose to believe. If we're sincere about real change, instead of letting ourselves be mesmerized by what's going on outside us, we need to look inward to the source of our experience, our core beliefs. If we believe in separation and scarcity, we'll create a world dominated by fear, competition and violence. If we believe in oneness and sharing, we'll create a world where love, partnership and peace prevail.
To understand why we choose the beliefs we do, we need to look at what stimulates us more, the prospect of conflict and competition, or the prospect of peace and partnership? Which self ? Which world do we want to create? The choice is ours to make.
Worldchangeguy - t
Some of your fellow bloggers in this post are getting nervous about working for foreign companies at low wages. Why?
Per your theory, total wealth of the world should be pooled, then divided by the total population so everyone gets equal share. And we should repeat that excersize in real-time thereafter so that everyone at all times have equal wealth. What a wonderful world!!! I feel like breaking out singing!!!
Somewhere between the tyranny of equal shares and the tyranny of unfettered capitalism, we must find common ground. That's the partnership I'm looking for.
Nofuzzydreams: I hesitate to get involved in your debate since my com padres are doing quite well refuting your nonsense. Since you are not native to the US and don't share a common history with those who were born here, I suggest that you tread lightly.
Quite naturally, if you are from India or some such country as I suspect you are, it has been quite a step up for you to come to the US. But for us, the fruits of our country have been stolen step by step by the new feudal lords.
So please, go back to India with the riches you stole from us or shut your mouth about things that are beyond your comprehension.
If the current real estate mortgage crisis is at issue the problems are fairly obvious to the insiders of real estate... and the observers of consumption capitalism in general.
If the following 3 issues are not addressed future mortgage meltdowns are inevitable!
Problem #1 - No Fiduciary Responsibility from Lender to Borrower: Simply put... Loan officers, underwriters, and appraisers to a much lessor degree because they are regulated and must hold a license... unlike a loan officer, work for the bank not the borrower.
Problem #2 - Ignoring Existing Laws: Law(s), such as the federal law TILA (Truth In Lending Act), were created to to protect borrowers by reqiring lenders to provide a clear understanding of the loan terms?
Problem #3 - Non-Regulation: All an individual needs to become a lender is access to money and someone in need of money... what a racket!
Ok, Kevin--we're in deep shit, and I think everyone here knows that now. What we're waiting to hear from you or someone like you, is what's the fix? I don't need to know if my stocks will go up or not, I need to know if we will have a country here tomorrow! You're a bright guy. Any insights?
Rule Of Law,
I believe Mr. Phillips summed it up at the end of his blog. "...no plausible way out." There are some things that don't have a "fix". Much like the Iraq war, there are no "fixes" anymore to policies that should never have been, or at the least should have been mitigated long ago. Ok, we can start now..reregulating banks, ending the raid on S.Sec.,repealing the Medicare drug funding,finding alternative energy for transportation rather than oil,reinvesting in manufacturing in America, cutting carbon emissions, etc,etc. The list is long and "we" have wasted so much time insisting that "the state of the Union is strong" and "it's morning in America" that we have dug the hole very deep. Unfortunately for the last 30 years anyone saying that any of this was a problem, (and we should take action) was drowned out by various think tanks and radio pundits decrying such negativity. You know what has been, and still is, said.."peacenik nuts"..tree huggers".."they hate America". Anything to ridicule the messenger. Somehow, when things really blow up, I suspect it will be blamed on others..unions, working poor, welfare moms, immigrants, Islamists, the Chinese, the Russians, Huffington Post, (maybe you and me). Anyone.... other than the true culprits.
Look for a ramping up of Hostilities with Chin a shortly after the Olympics! They hold most of our debt, which, they think, gives them some leverage with us. Too bad the Fed is a private bank funded by a consortium of European and American banks that have no National Loyalty. When they tell the Chinese to get stuffed, expect the American Military to be aimed in that direction and we will conveniently forget about the Middle East for a while.
Medicare has became a profit machine for insurance and drug companies and those two are intertwined together.
The republicans even passed a law forbidding bidding so it is hard to get the best price for Medicare.
We need to require the use of generic drugs, except when they can't be taken for medical reasons. We need to self fund the supplemental and quit subsidizing the big insurance. Kick them out.
The government is subsidizing the private companies so they can offer more coverage while letting Medicare pay less. They love to cry that Medicare is going bankrupt. They won't stop until it is privatized.
It won't cost jobs to kick them out, we still need accountants and controllers.
Kevin Phillips has written in the past about the similarities between the end of the British Empire and the historical cycle the US is currently in. Reading that I felt warned. Now reading Phillips blog here, I feel my concerns turning to fear. This is the twilight of the American dream.
Will the well-off leadership in this country understand that not only does an overhaul of the finance industry with laws and regulation is needed, but also a real change in mindset is necessary from the belief that greed keeps the economy going and that the 'benefits' of that greed trickle down to the 'lesser' 99% of the country? Will our leaders understand that complicated unproven finance schemes do not constitute innovation?
One does not need a degree in economics to *feel* the squeeze one is in, to *feel* that the economic indicators the industry/government uses are obsolete and misleading, to *feel* that business and government policies based on those fudged indicators are assualting one's pocketbook and sense of fairness everyday. Can we have a return to fairness and common sense - or is it too late, as Phillips alleges?
I'm openly irreligeous. That said, God bless you Kevin Phillips. I wish you could replace Lou Dobbs.
Actually Big Government is the source of the problem. Simply put, the Federal Reserve, effectively an arm of the government, printed money while other government programs encouraged reckless lending and securitization on Wall Street. For decades.
So what do most people think is the solution? Let me guess: bigger government.
http://www.lewrockwell.com/paul/paul447.html
Whether to have big government is a false question. A nation of 300 million will necessarily have a big government to build roads, coin money, and enforce contracts if nothing else. The question really is what kind of government. Do we want one where the information is oligopolized by a structure bent on self-aggrandizement to the detriment of the commonweal, or one where the free market of information provides for better informed decisions. We need decrease concentration of media ownership.
Very well said
Lew Rockwell is a libertarian website Libertarians believe in no regulation of any kind. They believe financial institutions should be free to steal as much as they can. The savings and loan disaster under Reagan was a result of reduced federal regulation. The current so-called sub-prime disaster is the result of reduced regulation that began under Clinton and accelerated under Bush. The United States of America is being sold to foreign interests bit by bit. The "Dilbert" solution proposed by Paulson is just kicking the can down the road.
The financial institutions did what the government would let them do which was whatever they wanted to do which was steal your money. Lew Rockwell is Libertarian web site and Libertarians are fools.
Wrong: better government.
Bigger and better government, huh?
Dream on. It's your money.
Or are you after mine?
The Permanent republican fascist majority is still moving forward toward a Hoover depression, so they can further dominate the peasants and avoid prosecution.
That is why Impeachment hearings are NEEDED, I could care less if the Senate rethugs block conviction, ...
Impeachment hearings are so necessary to put the BushCo fascists on the defensive:
to stop and reverse their forward momentum toward total control.
To stop the Iran War Crime from every starting
To end the Iraq War Crime,
To stop Torture, DOJ partisan justice, Orwellian surveillance, Looting of the treasury by war profiteering cronies, partisan MSM propaganda blitz, and god knows what else.
We need to strip away executive privilege and expose the fascist cronyism that has stained our democratic republic. We need to strip away the 1000's of lies and deceptions of Bush&Co.
House: start the Impeachment! posted
HuffPost's Pick
I find it hilarious that man - who constructed and manages the financial world, is unable to predict the results of plans and actions in this area - even 5 years ahead.
Yet somehow we've managed to convince politicians and most of the public, worldwide, that we can predict climate change (over which we have no control and not much influence) 50 and 100 years ahead. What's more, they're all sufficiently convinced by the supposed accuracy of these predictions that actions - including financial ones - are being taken to alleviate problems that it will cause.
Would anyone care to suggest why one set of predictions is likely to be correct when, even in the areas we control, prediction has such a dreadful record of inaccuracy ?
Alan Greenspan suggested that if he had two predictive paradigms for the stock market, one technical and the other psychological, he would choose the latter. It's difficult to construct computer models which have as their inputs psychological and emotional variations. When dealing with a non-emotional issue such as atmospheric and oceanic science, the inputs can be modeled with more precision. Climate change and financial transactions are two completely different fields; throwing up one's hands and saying that mankind can never predict anything because of the difficulties in one field doesn't make much sense except as the sort of generalization one hears from the next bar stool.
Alan Greenspan is two things: A master psychologist, and a thief!
You don't understand. Global warming is not about climate prediction but about getting all of us to line up happily behind those who cleverly proclaim:
"The country needs, you sacrifice, and I lead".
If you want to know the future, try a Palmist! This guy nails this point---
"During Greenspan's 1987-2005 tenure, the sum of public and private debt in the United States quadrupled from just over $10 trillion to $43 trillion. Finance became the industry that was not allowed to fail but was permitted to enlarge and metastasize its behavior almost at will. Regulation was minimal. Favoritism was omnipresent."
And, as Bob Dylan said, "You don't need a weather man to know which way the wind blows!"
Rule: You rule!
Have you read:
Creating New Money - by the New Economics Foundation?
Apparently the predicting (in BOTH examples you cite) is not the problem here, but it is the prevention of worst-case scenarios to come. It is the wish of those of us who would like to see an erring on the side of caution, just as it is the resistance of those who are in power and those who feel they stand to lose in the short term. Just like, to counter your assertion, that the overwhelming consensus is that Man is influencing Climate Change at a high level, Man also can influence climate for the better.
It's all about regulation--whether it involves government and independent oversight of our private sector financial institutions, or strict changes in the way we use energy to at least slow down the seemingly inevitable onslaught of catastrophic Human-Caused Global Warming.
That is a simplistic comparison:
Climate change is based on physical properties. (The Molecular weight of certain compounds, chemical reactions, currents in the oceans and atmosphere.)
Wall Street is base on, among other things, speculation, false accounting practices, stock prices that can fluctuate on the basis of a new invention or a rumor (true or false).
With Global warming, although some pollution is hidden from view, we can measure amounts of compounds and see how much certain compounds push the global temperature.
With the Financial markets... we don't know much. Deregulation has lead to and unprecedented amount of hidden accounting tricks. No one really knows how much bad debt is being held by what bankers. The practices of Enron are only the beginning.
And we can change banking regulations or print up new money and change things (for better or worse).
But we can't manufacture a new atmosphere, or redefine the laws of science so that gravity works differently.
Shop shilling for Exxon Mobil.
Last comment is just a stupid slur. I have never been employed in any power related industry and spent my working life as a science lecturer - paid only as a public servant.
I repeat my comment above "your idea that climate is a simpler phenomenon to predict than finances - this just has to be a April Fool joke !!"
Or I could quote from Emeritus Professor from London University School of Tropical Hygene
(ie unrelated to power industry)
"Climate is the most complex system we know, governed by thousands of factors, But the point is, it‘s like Glasgow on a Saturday night, chaos. And what we‘re trying to do is manage it by dealing with one pub. One. And it just won‘t work, that‘s the danger. In such a system, doing something at the margins and not doing something in the margins are equally unpredictable. And the question we should be asking our politicians are, what climate are you actually aiming to produce and when we get there won‘t it change anyway? The crisis is therefore in ourselves
I was just thinking yesterday that Kevin Phillips is the classic example of what we are allowed to say in this country about "finance". As articulate as he is, he still has to talk in code. In this case, as in so many others on this topic, the first W remains for the reader to recognize.
Friedrich Hagel, the famous German philosopher, once replied to a students inquiry who said, " Herr Doctor Professor, your theories are inconsistent with the facts!" The Professor's reply was, " Well, so much the worse for the facts!"
Free marketers are ignoring the events that led up tp the problems in the market caused by a total lack of regulation. President Clinton was persuaded to eliminate the Glass-Steagall regulations put into place originally in 1933 to protect against some of the very abuses that caused the present problems. Was Bill Clinton being softened up by the Lewinsky scandal. Did the tail indeed wag the dog? How can a Democrat be blackmailed into eliminating the centerpiece of Franklin Roosevelt's New Deal financial regulation legislation? Is Eliot Spitzer just another casualty of this greed?
Whatever your ideological framework, greed causes corruption. That is a fact. Capitalism works on the greed principle. Finally, the greed is able to control the politicians. The politicians remove the barriers to unbridled greed, and the greedy steal enough money to ruin the system for everyone. So thought Karl Marx and Albert Einstein. The cavalier attitude of corporations toward the environment or the effects of war in the modern age are further examples of unfettered greed in action.
FDR realized that the greedy bankers would again and again steal everyone blind. To save capitalism he put in place reasonable regulations.
"I'm here from the government to help you."
Outnow, that was brilliant! Brilliant! Thank you, and seriously you have provided a great slice of history for some youngsters/grandkids who are now following this election, $$ crash and war. A big salute to you.
interesting post
HuffPost's Pick
You called it yourself, Nofuzzydreams-----You don't know anything about finance.
Thank you so much for the incontrovertible evidence you gave us in your post
to support that fact.
I salute your honesty.
It looks like my comments have generated quite a bit of reaction in this post including this one that got Huffpost pick. I guess that is not surprising as most in this post would advocate socialism and wealth distribution.
I came to this country with $22 several decades ago and have done quite well, thank you, first studying hard, then working hard and not whining - and I did not need wealth re-distribution. At the end results matter -
- per capita income has risen in the US and worldwide in the last 30 years
- life expectency has increased in the US and worldwide in the last 30 years
- fewer people are going hungry at night worldwide than they did 30 years ago
- there are more opportunities for people of all color and races than 30 years ago
These are not generalizations but facts - you can all look it up.
So go home and dream about your dreamboy Obama getting elected and re-distributing wealth! Will not happen you nuts!! Let bet on that and we can talk again in November.
- per capita income has risen in the US and worldwide in the last 30 years
- life expectency has increased in the US and worldwide in the last 30 years
- fewer people are going hungry at night worldwide than they did 30 years ago
- there are more opportunities for people of all color and races than 30 years ago
Please support all of this with appropriate data.
Nikto - I saw some of your posts - what crappy language! Is that English?? No wonder the US is not producing enough qualified workers!!!
When I talked about my knowledge about Finance, I was just being humble!!
I have far more knowledge of Finance than you do - I can guarantee. I used to teach Economics to grad students earlier in my career.
If there isn't a plausible way out then lets try the implausible. Lets use our Iraq Oil. Americans worked and even fought and died over oil. We invaded Iraq and, as Colin Powell said, "...you break it, you own it.".
Per capita income from $100+ bbl is an American right, if only even by default.
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