Wake up Congress! The financial reform bill you just passed won't protect us from economic chaos. Why? Because it fails to burst the mother of all bubbles -- Wall Street itself.
Our outsized financial sector is a clear and present danger to all of us. This gigantic bubble, which bankers and politicians have been pumping up for the past 30 years, now casts a dark shadow over our economy and our political system. It has distorted our distribution of wealth, making a few people obscenely rich while shrinking what's left of the middle class.
The financial industry bubble started expanding during the 1970s with the push for deregulation. It grew even faster in the 1980s after Reagan and Congress dramatically cut taxes on the super-rich. The wealthy had to do something with their excess money, so they turned to financial gambling. Wall Street grew and grew, rising from about 7 percent of all corporate profits after WWII to more than 30 percent today. Financial executives got exceedingly rich. As Simon Johnson and James Kwak point out in 13 Bankers, "From 1948 until 1979, average compensation in the banking sector was essentially the same as in the private sector overall; then it shot upward...until in 2007 the average bank employee earned twice as much as the average private sector worker."
As I noted in my book The Looting of America, the ratio of compensation of the top 100 CEOs to the average worker shot up from 45 to 1 in 1970 to a whopping 1,723 in 2006. Did the execs -- and the financial execs in particular -- get that much smarter than the rest of us?
In a way they did. They got smarter at siphoning off the wealth from our economy while adding little to it. They learned how to leverage gigantic financial bonuses for themselves. And when their financial house of cards collapsed in 2008, they figured out how to get Congress to hand over more than $8 trillion in cash, asset guarantees and cheap federal loan facilities, a vast taxpayer-financed bailout. And so, just two years later, the Wall Street bubble is once again inflating -- and gobbling up our nation's wealth.
This week's chilling Los Angeles Times article on our anemic recovery ("Consumer spending trend is a shaky foundation for economic recovery") reveals the contours of our bubble economy:
Much of the new spending has come not from America's broad middle class but from a small slice of affluent people at the top....
What's more, some analysts calculate that another big chunk of the recent spending spurt has come from an even shakier source -- delinquent homeowners who have more cash in their pockets because they've stopped making mortgage payments now that their houses are worth less than the loan amounts.
So apparently our economy is being rescued by 1) some of the same "affluent" people who caused the crash in the first place -- and then benefited from a bailout financed by middle-class taxpayers; and 2) victims of the housing crash, who are now walking away from their homes with a few dollars in their pockets.
This week we learned that home foreclosures have reached a record high. Maybe we should break out the champagne, since our economy is apparently depending on these folks.
The Wall Street bubble and our pathetic recovery are the result of having forgotten everything we learned during the Great Depression. If we want a strong middle class society, we've got to impose steep income taxes on the super-rich and tightly constrain the financial sector. We're not doing either of these things, and so we're looking at a future of economic chaos.
It's obvious why most Congress members choose to ignore the biggest bubble of all. Too many politicians rely on financial industry contributions to win office. Too many want jobs on Wall Street once they leave office. Most just don't have the guts to take on the financial elites.
So how do we puncture the bubble and save our economy? In theory it's not very hard. But in practice it will take a mass movement that aims at the right targets.
1. Break up the top twenty banks that are too big too fail. Entities like JP Morgan Chase, CitiGroup and Goldman Sachs are a danger to our democracy. Together these 20 big banks constitute an oligopoly with a stranglehold on our economy. They stifle competition and fix prices, they gamble against their clients, they siphon off our economic wealth. Perhaps most critically, they control economic policy. Today, the question on nearly every politician's lips is, "How will the markets react?" Is that democracy?
2. Institute a financial transaction tax. You would think watching the Dow drop 1,000 points in a hour might create an "aha" moment for our leaders. If not, all they had to do is read the New York Times piece describing the life and times of high-speed traders. These people account for 40 to 60 percent of the volume in the stock market, making billions of trades each day. How long do they hold what they buy? No more than 11 seconds. No joke.
The big banking houses are into this game. When pressed they insist that high-speed trading is great because it brings "liquidity" into the market. But who really needs this liquidity? Certainly not your average mom and pop trader. Big bankers like fast trading and "liquidity" because it allows them to siphon even more of investors' money into their pockets. What do we do to stop this vast flow of money to the ultra rich? Put a very small tax on each and every financial trade. The tax could exempt a certain amount so that it targets big bankers and fast traders, not any individual mom and pop traders who are still left in the market. Will it unemploy some day traders? It might. But perhaps our day traders should put their magnificent skills to work in the real economy -- by, say, teaching people math and computer science. (Well maybe not, since the Wall Street-caused fiscal crisis is leading to tens of thousands of teacher lay-offs.) A financial transaction tax could generate about $100 billion a year to help fund or stimulate job creation and/or reduce our deficits. Why don't we hear the deficit hawks screeching about this?
3. Pass a windfall profit tax of 75 percent on Wall Street bonuses and hedge fund incomes (no matter how the money is packaged and laundered). Wouldn't just about any regular American like this idea? We bailed out Wall Street, and they used the money to pay themselves more than $150 billion in bonuses. And now, we want our money back. Does anyone really think that that the top 25 hedge fund managers who waltzed off with $25 billion last year actually deserve all that money? Can anyone think they're worth as much as 658,000 entry-level teachers?
4. Raise the marginal tax rate on those earning $3 million or more per year to 70 percent. (This is quite conservative. The rate was 91 percent under the communistic Eisenhower administration.) If anyone has any real evidence, not faith-based theory, that multimillionaires -- or our economy -- would suffer under such a tax, please let me know. I haven't seen it. Financial columnists like Andrew Ross Sorkin seem enthralled by the capacity of rich people and their fancy lawyers to circumvent such taxes and fees. Yes, they will find ways around stiff taxes, and yes, they are very clever. But where's our outrage? Instead of admiring the sly tax evaders who buy congress members and capture regulators, we should be calling them on the carpet. They are not adding to the nation's wealth, they are looting it.
5. Ban the sale of complex derivatives to all public entities and pension funds and ban public and pension investments in hedge funds. Congress may or may not succeed in passing new rules to curb dangerous derivatives and to bring a bit more transparency and controls to some of these instruments. But it's a crime against humanity to allow any Wall Street firm to foist complex derivatives on public entities and pension funds.
When I wrote about how predatory bankers were ripping off five Wisconsin school districts, many readers argued that the school officials themselves were to blame -- they should have known better. Now Capital News Service is reporting that public entities and pensions funds in at least 16 states are facing losses that may amount to over $25 billion. Wall Street got the fees, and the public got ripped off. Afterwards, we bailed out Wall Street, but not its victims. Just another case of public money being used to pump up the Wall Street bubble. A ban is the easiest way to bust this part of the bubble.
So who's going to make sure we bust the mother of all bubbles? Nobody but us, the American people. The battle is just beginning. As Bob Kuttner points out (Presidency in Peril), it took at least seven years -- and a lot of public pressure -- for the New Deal to succeed in reforming the financial industry and taxing the super-rich. We are only in Year 2 of our meltdown. The financial elites are hanging on for now, but the American people are wising up to their scams and are hungry for retribution.
They are also hungry for jobs. And that is the key to our economic conundrum: Consumer spending by the wealthy and by people who have abandoned their mortgages cannot possibly create the 22 million new jobs we need to get near full employment. We need to build a vibrant, sustainable economy with a big middle class -- and we can't do that as long as Wall Street keeps siphoning away our wealth.
Right now the Tea Party is capturing much of people's frustration and anger. Unfortunately, the Tea Party's program of cutting taxes and attacking government regulations is a bad joke when it comes to Wall Street. It will only make it easier for the financial sector to inflate itself and further deflate the middle class. If we're going to save ourselves, our families and our country from the ever expanding Wall Street bubble, the rest of us are going to have to get active and soon.
Pass out the pins.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.
Follow Les Leopold on Twitter: www.twitter.com/les_leopold
Robert Creamer: Senate Vote Signals Historic Change in Wall Street Political Clout
For four decades Wall Street had its way with American government. The big Wall Street banks and their economic apologists dominated the main stream of economic thought. Last night their domination came to a screeching halt.
http://motherjones.com/kevin-drum/2010/02/our-oppressed-billionaires
The problem (as was demonstrated in the Stifel Nicolaus/Wisconsin cases ) is that you have unqualified dolts making the decisions for those said school districts. They were not qualified in the least to make decisions on investments. Also, in the WI cases the investments weren't used for pension accounts - they were used for non-pension teacher retirement accounts. The state of WI manages the pension plan (WRS) not the individual districts.
However, those small districts in Wisconsin (I'm from WI) had no business using derivatives. They were in WAY over their heads. Total rubes. However, state law actually encouraged them to go that route (it's too long of a long story for this post).
Where do you sign up to become credit-ineligible?
I have written my rep. and sens. numerous times over the past two years on the financial issues primarily. First, when I opposed the bailouts, all three wrote back to me and said that we had to do it. And their other answers have been increasingly wishy-washy. I have spent a great deal of time and energy on it.
In the U.S., we started being exploited by the corporations soon after WWII ended (1945). The corps. had learned the value of propaganda and began to pour it on through Madison Avenue, TV, and Hollywood--a seemingly endless series of films demonstrating how John Wayne had won WWII almost single-handedly. Then there was McCarthy and the Red Scare in 1948 which began to instill a false fear in Americans. George Orwell gave us food for thought about all of this in his book "1984."
We probably need to review every government decision made after 1947. The Marshall Plan (1947-1951) was the last real magnanimous act the U.S. did for the world. With that, we provided the type of humanitarian aid we like to be known for (and we probably stopped Western Europe from being absorbed by Stalinism).
Yes, maybe it's time to get out the pins. If the message is not "Kiss Your Middle Cl..ss Good-bye", it more simply could be "We Are Doomed." In any case, the pin will get attention.
They only tried to hide their real goals between 1935 and 1980, when their puppet Ray-gun assumed the White House.
Greed has never been self-regulating, and only an honest government can act to secure the common good. If this country topples into third world status in the next generation, it will be the greed of the wealthy that nails the lid on the coffin of the American experiment.
It's hard to argue.
Capitalism will not work in the sense that the US is practicing it because the massive emphasis on deregulation and lack of social responsibility will inevitably destroy the middle class, which has to be the heart of any capitalist economy. Middle class used to be one person working at say, 45k per year in the 70's. Now, it's 2 people at the SAME WAGE as in the 70's, with daycare costs, and increased costs in everything else due to inflation. Since Reagan basically destroyed labor in the US, it has been a continuous downward spiral.
But whenever someone tries to talk about ways of fixing it, peoples' abject fear starts to kick in and everybody starts pointing fingers and screaming "SOCIALIST"! at whom ever is speaking.
When a system is as clearly broken as the US one is, nothing should be off the table as a topic of discussion. It's that kind of closed mindedness fear that made it that way in the first place.
Sounds like Chavez gave a realistic evaluation on our condition.
In the late 1940s and the 1950s, the U.S. was made very fearful by the talk of communism and socialism. People today have no concept of how powerful McCarthy became with his Red Scare hysteria. Well, we still see evidence of it by fear (and ignorance) of the word Socialism. But only reactionary weaklings think that way. Still, they own the media so their agenda affects all of us.
All of the old political designations and definitions are archaic--communism, capitalism, socialism, democrats, republicans...all catch words to fire people up to a particular cause.
We have to set all those old terms aside. We have to deal directly with issues, set prejudice aside, and establish a new social contract which has some justice in it.
The second you wind people up, emotionally, they immediately lose all ability to be rational. That's how the Nazi's became so powerful. People don't often reflect on the fact that Hitler's party had 30ish% of the vote. People do and think all sorts of crazy things when you wind them up. It doesn't really matter what the emotion is, but fear, anger, and pride seem to work best in the US.