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.

Comments

[Lemeritus]

Mr. Phillips, I'd like to add my voice in thanking you for your work and particularly for your prescient book, American Theocracy. It's rare that a single book can refocus my stubborn thinking; American Theocracy gave me a rational way of understanding so many things. I refer to it often and recommend it wholeheartedly (and as often as I can).

[DanBest]

I second that. Also "Wealth and Democracy" explains the nexus and apparent contradiction of wealth versus democracy. I'll reveal the ending. Wealth wins. Democracy loses.

[Lemeritus]

Oh, darn! And I was so rooting for plucky little democracy!

[schatsie]

I also really appreciated American Theocracy... so tired of all the drivel coming from the MSM and it was a blessing to read a book that really addressed major issues of our time including the current fiasco.

Anybody who believes in the Free Market must be ignoring the pillage of the companies by the CEOs. I am willing to bet dinner at the Capital Grille if anybody can prove to me that the Taxpayer Bailout for these CEOs is more than the Bonuses, Salaries and other Perks (don't forget the jets) that magically appeared in their pockets over the last 5 years.

[NChooseK]

Plenty of people have already plugged "American Theocracy", but let me add my voice. The title only mentions one third of what the book is really about. The other two thirds are the influence of big oil and the the influence of the financial markets. While the press frets over Obama vs. Clinton, the real story of today and all the years since the book has been published are all the malign influences Phillips skillfully examines.

I look forward to your next book, though I know it will not be full of good news.

[newunderground]

There are only 2 honest conservatives I know of. Kevin Phillips and Norm Ornstein. Kevin Phillips is a great Author. Read his book on the Bush Dynasty. They've been feedinG AT THE war trough since WW1.

[biglover]

I have read his books and I am a fan. A fan of honesty and integrity of which Mr. Phillips is long in the tooth.

[PiratePrentiss]

I am a huge fan Kevin. Your book "American Theocracy" blew me away, and really opened my eyes to what's going on in this country. Thanks for presenting this important information so concisely. I wonder if it is indeed too late for America to turn itself around from what appears to be an inevitable decline

[newunderground]

Oh yeah, That was a GREAT BOOK too.

[mickeyrat]

I agree absolutely. If I had one book that I could force Americans to read, it would be American Theocracy. The single best job I've ever seen of wrapping the information people need to make informed decisions about where we've been and where we're headed to in the upcoming years in terms of the death grip the evangelical/oil combo has on this nation's body politic.

Phillips is a modern day Cassandra. No one will believe him until it's too late.

[Uselessboy]

I think low top-end taxation is the rock upon which the golden calf of all financial demon worship is founded. Once you allow most of exceptional rewards to be retained, it becomes worthwhile for enterprise to offer bonanza rewards, and so an entire universe of corruption and sociopathic management and governance is opened up.

Business and finance and information technology evolve at the speed of light. Yet they confront a Constitution and humanity that are grounded in ice age frontier mentalities.

It's not even a contest.

[americaforme]

Our Economy is so tightly rolled up in greed,it will be tough even in observation to see where it went .amuck. I do believe that separating the roll is an impossible task, and any baker would tell you chuck, the mess. Dont be condesending to the (average american) they knew all this crap was happening, but they could not hold back outsoursing. Systematicaly the unions were destroyed. Corporations merged,monopolys became the order of the day. Foriegn investers were invited to snatch up our auto industry, and other priceless chunks of property..The small farmers were destroyed by the banks,sucking the mid west dry..Corporate farming killed humble folks. More greed, needed more cheap workers. Wars needed the corporate scheemers,it was get all you can get and let the devil take the hindmost. I do believe that if we wake the sleeping tiger, America can again be the home of the free, land of the brave.

[Clinton]

Not as long as the electorate remains in it's current state of infantile hypnosis and bondage to 'entertainment'. Many people don't even read books and can't absorb knowledge that isn't prepackaged to taste good and digest easily. And we've come to embrace (with our actions, never mind the moralistic claptrap that comes out of our mouths) the ethic of 'get mine while I can and to hell with the suckers out of the loop'.

[edva]

As the Buddha pointed out many centuries ago,
humans are afflicted by greed, (along with anger
and ignorance).
He also said that afflictions can be healed, with
effort and diligence.
But one has to want to heal, and our society seems
content to poison itself behind the banner of "capitalism,
democracy, and the free market economy".
All actions have consequences. We will get the fate we create.

[AlisonChaynz]

It all started with giving control of the currency to the private banksters (bankers+gangsters) of the Federal Reserve. Thomas Jefferson warned us what would happen - and it's happened.... oh and Ron Paul is crazy... uh-huh.

I'm sooooo glad I started listening to people like Ron Paul and others years ago. I've got gold, silver, lead, land, stored food and water. People thought I was crazy, but I was preparing for the economic storm that's about to hit. Who's crazy now?

The American people are the citizens of a dying empire, and at the ends of empires, the citizens are morally, intellectually, and economically bankrupt. That's why so few have been listening to people like Ron Paul and Kevin Phillips and Peter Schiff and THE GREAT MOGAMBO GURU!

We've let the bankers and corporations and politicians destroy this country, and if it is to be restored, the ruling class will have to be knee-capped -- just keep an eye out for Blackwater.

[LeBelAge]

The American people as a whole are not listening to the likes of Ron Paul. Ron Paul as a libertarian has no solution to our current financial crisis. Libertarianism, is the economic wing of neo-conversativism which has brought us our current economic problems. Libertarianism promotes de-regulation and no government oversight. You don't have to be a libertarian to see which way the economic wind is blowing and you can't expect the likes of Ron Paul to save the day either.

Its time for the most dreaded word in the English language, to save America from itself, socialism.

[newunderground]

THE GREAT MOGAMBO GURU! I forgot to add him and the great Bill Bonner and Addison Wiggins to the honest conservative list. ILTMG (I love the mongombu guru!)

[schmuckwithearlaps]

Thank you for your insight. I am happy to see that none of the comments I have read so far blame this all on the Clintons. That is indeed a pleasant surprise. After the S and L crisis, this was not supposed to ever happen again. Just like Iraq could not have possibly happened after Viet Nam. Why did no one blow the whistle when it was obvious that millions of people were buying homes they could not afford?
Why are twenty thousand dollar tear downs in places like Santa Monica California still selling for two million dollars? I think there is an answer to all of this, and it is one of the inconvenient truths that people do not like to hear. The bubble that has now burst was not just the real estate market. A few years ago the Wall Street journal had a lead article about 401-K millionaires--blue collar people who were millionaires because their 401-Ks were riding high before the crash. Anyone who owned a home in many large cities was a paper millionaire like the people in Santa Monica because their home equity was a million +. The democratization of greed (please remember that phrase) was one of the worst things that ever happened to our country. Like the roaring twenties never happened.

[kfdan]

"... 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."
It's the same gang since Roosevelt driving the U.S. to a ONE WORLD ORDER and to accomplish their goal of total domination of all resources, they need to end the Republic in real terms and maintain the fiction that the U.S. is a free country at the same time. The story does not get told because mainstream media does not tell it. Ask yourself why that is?

[mickeyrat]

perhaps because too many want to wrap up the serious problems that Phillips points out into their own fantasies of "one world government" the "bilderbergers" and the CFR.

People like you do more harm than help. Being aware of the problems we face is different than straight out black helicopter paranoia.

Please, if you want to save the Republic, shut up. The way you talk, I guarantee folks will dismiss the real problems Phillips points out as they dismiss the paranoid fantasies you exhibit in your post above.

Nothing personal--there's a lot of Americans like you. But, please, SHUT UP and let those of us still relatively sane explain Phillips to Mr. Averageman.

[SisterAnn]

Kfdan is right. I have watched it all unfold and came to the same conclusion on my own.

There is room for both of your theories, because both are correct.

Here is an example of the difference of 18 years ago and now:

When we got our last mortgage 18 years ago, they took info on his income, what assets we owned and years of work. They checked with where he worked to make sure the info we gave was ok. They also asked for the last 3 years of income tax returns.

The appraisal they did on our home was paid for by us, but controlled by them. The aappraiser made the remark that he would have appraised it higher but the bank wouldn't let him.

The lenders now, tell them to put down higher income and never check it. The higher the appraisal, the more money they make. No regulations are enforced, if there are any left.

They said that they had to help Bear Sterns because the market was intertwined, that if they hadn't it would have had a domino effect. If our markets are too intertwined and too difficult to regulate, we need to break them down to smaller pieces, that are not dependent on each other.

[Clinton]

Of course you are free to express your opinions, but proof would be more persuasive.

[MrsWakely]

mm

[Rog49Thomas]

The fundamental problem is twofold:

(1) A naive belief in the "magic" of markets to self-regulate before a major crisis hits (once the Titanic has hit the iceberg it's quite a different matter)

(2) A bone-headed doctrine that all government regulation is bad because it interferes with the smooth functioning of markets

[RButler]

Are 'free markets' always going to run into an iceberg before they correct?

[NoOneSpecial]

I would argue that "unregulated free markets" will, yes. It all looks great on paper, but it doesn't take into account the nature of a portion of human beings who will grift the system solely for personal benefit and ruin it for everyone else. We have innumerable examples of this.

Same thing goes for allowing corporations to police their own compliance with pollution laws. Or food inspection. Or safety laws.

In every case we see oversight removed and corruption, greed, lack of rigor, dishonesty and cheating take over.

Here's a radical thought. Why not get rid of the police? Or at least only keep them around for things like murder. After all, the magic of self-control and correction will naturally lead human beings to have just as good if not a better society without police.

Right?

[Rog49Thomas]

Without regulation they will a statistically significant number of times.

Enough times to warrant rules, supervision, etc.

[DumbDad]

Perhaps, Mr Phillips, you have at last smoked out the real villains. I read all three of your books on poverty and thought you were as clear as a Biblical prophet, to no avail. How come nobody in power was listening? Answer: finance was in charge of the whole shebang: policy, regulation, politics and media. Thank you for another superb gift of labor and intelligent research.

[Boris]

Kevin, either I am getting more conservative or you are getting more 'reasonable.' I despised you when you were a big Reagan fan, but then, a lot of people I respected followed that bus off the cliff.

Most of what has happened today should have been avoided by studying the S and L disaster. But, the pull of 'deregulation' was too great for our political process to withstand. The Grover Norquists and others who talk about unleashing capitalism and getting out from under the stifling bonds of oversight are now seeing that the Bullshit about taxes, regulation and unrestrained greed is piling up outside their doors.
Why you are not the voice of the GOP regarding economics is beyond me. I only hope the next president takes cues from your books.

I hope to read more from you in this website.

[January]

Phillips has been screaming about the growing disparities in the American economy for nearly 20 years now. He solidified his argument with statistics that showed the rich getting richer and the poor getting poorer. He compared what has happened to the Gilded Age. Almost no one in power wanted to listen. That includes those in other countries who saw the US as the safest investment in the world, and therefore have been willing to lend us money making our credit unlimited.

I suppose that all sensible people knew it could not go on forever, but all hoped it would go on until it was safe for them to get out of the rat race. "Take the money and run" is the economic slogan for the last twenty years.

Yes, there is enormous liquidity along with the enormous debt. We are about to find out how tightly the wire of credit can be pulled before it snaps. As we have never been here before, it is anybody's guess. Are we strung out? Not until unemployment gets out of hand. That's what matters, even while the media loves to focus on the billion dollar writedowns and the jumpy stock market. Take away American jobs, close down American business, and we are in for deep trouble. It's the WPA all over again, if we can still afford it when we need it.

[Overd0g]

The WPA paid in phony money. We'll need another world war, like in the 30s.

[elpollo]

Of course it was paid in phony money. The Federal Reserve was created in 1913. Now the Iraq war has created 3 trillion in "real" money? Either you are being sardonic or incredible stupid - it's not clear which.

[newunderground]

For that we need a REAL ENEMY. Al Queda aint gonna cut it. China and/or Russia maybe?

[DanBest]

Underdog, don't you ever tire of being wrong? While WWII helped pull the country out of depression, it was hardly the only reason. If war is such a panacea for a roaring economy then why are we tanking right now? (We are spending more than we did during WWII.) But anything to deny one of the great president's his legacy. If FDR was no good for America then why did he get reelected four times? Voter Fraud? Liberal Media? And really, you think we need a world war? How can so much stupid be packed into one tiny mind?