A few years ago, I bet a friend that the Dow Jones Industrial Average, an index of the leading American companies’ stock prices and one of the most celebrated economic indicators on Wall Street, would dip below 10,000 ‘points’ as a result of the oncoming credit crisis. Today I called him at work and said, “I won! Everybody else loses.”
I have steadfastly maintained that the American economy was overdue for a systemic, catastrophic collapse for many years now; and lately I have been fielding a lot of calls asking me what I think about the bailouts and the situation on Wall Street in general. My response, finely honed over the past two weeks, is now this:
It is clearly irresponsible not to pass the bailout. It remains to be seen, however, whether it was responsible to pass the bailout at all.
The bailout, a curious piece of legislation by all accounts, is the focus of the most confused ideological debate in American history. Is it socialism? Is it crony capitalism? Is it necessary? Will it work? The answers to these questions may be found in the answer to a simpler one: where is all this money going?
I bristle when people call the bailout bill socialism, and the reasoning is thus: when the government seizes private assets and then controls the means of production in the name of the people, that’s socialism. When the government seizes private assets and then hands the control of the means of production over to private entities, that’s “national” socialism, otherwise known as fascism. As Mussolini once said, “Fascism should more properly be called corporatism because it is the merger of state and corporate power.” The bailout, with its new provisions for government ownership of companies in exchange for federal purchasing of “toxic assets,” is a step in the right direction, but as any real socialist will tell you, the bailout plan is the furthest thing from populism or economic justice.
For those of you wondering how much further we have to fall, consider that more than three-quarters of subprime borrowers are still paying their mortgages on time. Watch for that number to continue to decline as the economy tanks. As I have mentioned here before, the three major causes of bankruptcy are job loss, medical problems, and divorce—and we’re not even talking about people who can’t make their adjustable mortgage rate payments because of hidden surcharges and “balloon payments.”
The bailout plan, as we have seen today, does not and cannot address the fundamental problems with the international market system. In the shell-game of capitalism where all banks are bankrupt by definition and the world’s largest firms still borrow cash in the short term to make payroll, the vaunted “rescue plan” is really just the equivalent of buying a three-card monte player an extra card. So how did we get here, and where are we going with all of this? And who, exactly, is to blame?
Faced with the collapse of the religion of deregulation, conservatives sought all kinds of villains in order to make sense of the chaos in a way that preserves their core beliefs. Blaming the victim (particularly minorities) has become the order of the day for the lassez-faire capitalist crowd. Ta-Nehisi Coates, blogging at The Atlantic, calls the narrative “blame the Negroes,” and that’s a pretty apt description. As far as I’m concerned, if we’re going to start blaming the victim, I would prefer to look at the 51% of Americans who own stock. But seeking blame is a convenient way to ignore the systemic problems we have created with late capitalism’s latest incarnation. When you look at trillions of dollars of “value” lost in a single trading day on Wall Street, you have to wonder whether any of that money was there in the first place, or whether the value of corporate assets across the board were inflated for the sake of balance sheets (as they were at companies like Enron, WorldCom, GlobalCrossing, Bear Stearns, AIG, Lehman Brothers, Adelphia Communications, Bristol-Myers Squibb, CMS Energy, Duke Energy, Dynegy, El Paso Corp., Homestore.com, KMart, Merck, Mirant, Nicor, Peregrine Systems, Qwest, Reliant,, Xerox, Refco, and the Italian company Parmalat, to name a few who have already been caught).
At the same time, there’s a growing undercurrent in business media which seeks to shift all the blame on lax regulators, like the following missive from Gil Schwartz’s Fortune magazine blog:
No, it’s not the fat cats who profited, or the weasels who sold the same bridge over and over again, or even the realtors who squeezed every last bit of juice out of the blood orange that was offered to them. These are all shallow, self-interested, slightly sleazy, ambitious, avaricious, mendacious forces that are DESIGNED to do what they did: Get away with whatever they could. Make the most money. Figure out rationalizations to make it all sound good. So you can’t blame the intellectual courtesans in academia, the press or the research departments of now defunct institutions who helped them do that either, no matter how tempting it is to do so. It’s the guys who were supposed to watch this sorry bunch and prevent them from taking over the funny farm. They’re the ones to blame. How simple do I have to make it?
(As you regular readers know, people who try to make things simple are the enemy of this blog.)
Nuremburg defenses and financial death-bed conversions aside, the question remains—what the hell is going on in the American marketplace?
We are now seeing the “destruction” of the value contained in stock price rise since the “economic recovery” of 2003. What nobody wants to admit is that none of this illusory value was there in the first place. The reduction in the capital gains tax led, among other things, to skyward-spiralling executive compensation (much of it in illegally back-dated stock-options—e.g., Apple, United Health, Comverse Technologies) and more generally, a single-minded focus on stock price. Even the implementation of Bush-era regulations in the wake of the Enron collapse, namely the Sarbanes-Oxley Act which aimed to curb corporate mismanagement by threatening corporate board memebrs with jail time, ended up doing nothing but increasing their salaries. Focus remained on artificially inflating the stock prices of publicly-held companies.
The financial crisis that has so far characterized the 21st century has its roots in 20th, as one might imagine. There are, in my humbly vindicated opinion, four key interconnected reasons why Wall Street and the international financial system is crumbling (said points are in boldface):
First of all, for the last 15 years, there has been an ongoing vicious class war in America. Guess what—rich people won! Poor people can’t afford mortgages! Congratulations. The underlying assumption of the class war, of course, was that Wall Street had successfully uncoupled itself from Main Street, so that the pains of the working class were good for business, or at least irrelevant to stock prices. The regressive tax system of the Bush administration, the dismantling of public services, the reigning in of non-defense related spending, capital gains tax reductions and so forth were all part of that bipartisan war on the poor. Notice that when poor people are suffering, nobody cares because it’s that class’ systemic role to bear economic pain; when rich people start suffering, you know the system is breaking down. The middle and upper classes succeeded in burying American workers in a deep dark hole. The only problem is, the rich stand on the backs of the poor, so now everybody’s in the hole. You can see a fine graphic representation of this phenomenon in the chart below depicting productivity vs. real wages, which uncouple themselves as soon as George W. Bush took office in 2001. The result of this warfare was the destruction of the ability of working class people to contribute to the economy in a positive way (more about that in a few paragraphs).
(You can also read my August 2007 post “The Rotting Corpse of King Croesus“, where my argument here was in its relative infancy.)
A parallel but much more storied aspect of the ideological battle in Washington, and the second horseman of the financial apocalypse, was the campaign to destroy the legacy of the New Deal, specifically the sixty year war of attrition against the Glass-Steagall Act, which was decisively defeated by Sandy Weill of Travelers’ Group and his pals on both sides of the aisle in 1997. The financial instrument industry, which is at the center of the current collapse, was nurtured and fed by this battle. Rich people have been fighting Roosevelt for years—from their Fascist plot to overthrow the President in the 1930’s (known as the Business Plot) to the rise of the modern lobbying industry.
The class war itself is part of a larger narrative of the end of the Cold War and the triumph of international capitalism. This is the rise of U.S. mandated globalization, a term literally invented by the ‘Third Way’ politicians in the Clinton Administration. The impacts of globalization are legion, but for now I’ll focus on the transition of the America to a service-based economy and the resulting massive trade and federal deficits, unprecendented in sheer size. The “Third Way” was supposed to be an ideological alternative to Republican-style lassez-faire capitalism and New Left-style social democracy. In practice this meant that environmental and labor regulations were considered legitimate market intervention, but systemic regulation regarding the structure of industries was considered off-limits.
Saskia Sassen’s excellent (and fairly unreadable) book “Globalization and its Discontents,” published in the mid 1990’s, identifies the disconnect between “Main Street” and “Wall Street” in fairly obtuse academic terms (and you thought I was bad):
Global cities are the sites for the overvalorization of corporate capital and the further devalorization of disadvantaged economic actors, both firms and workers.
What she means is, globalization isn’t about state-to-state competition the way everyone seems to think, but place-to-place struggles. It’s not about the U.S. versus Japan versus the UK, but about New York City, Tokyo and London versus Kansas, Okinawa and Yorkshire. “Overvalorization” refers to the fact that while the financial industry doesn’t create wealth (just moves it around), the miners, farmers, factory workers and small business owners who create actual value are being systematically crushed. When Bill Clinton was out selling NAFTA to Middle America, he promised factory workers that globalization would help U.S. manufacturing sell their goods to China. Within a decade factories were being closed down all across the country and the equipment was often shipped directly to China or Mexico.
What happened was that the US became an export-substitution economy, where we focused on a single industry to sell products to the rest of the world. Usually when economists talk about this phenomenon they’re talking about very poor countries whose economies are based on a single commodity, like coffee or sugar. In America, we focused on the financial industry, because there was no other sector that approached its profitability. We developed an economy largely dependent on corporate services, from banking to information technology. And while this happened, according to the Alliance for American Manufacturing,
Reaching a high of 53 percent of the economy in 1965, domestic manufacturing accounts for only 9 percent of GDP forty years later. Not since the beginning of the industrial revolution has a lower percentage of Americans worked in American manufacturing as they do today. Tellingly, just since 2000 the manufacturing sector has lost nearly 3 million jobs.
or, in Sassen-speak,
[T]he ascendance and transformation of finance, particularly through the securitization, globalization, and the development of new telecommunications and computer networks technologies; and … the growing service intensity in the organization of the economy generally which has vastly raised demand for services by firms and households.
Sassen talks about a financial industry where money (imported from places like China and Japan) is the raw material; financial “instruments” named things like “asset-backed securities,” “collateralized debt obligations,” and “exchange-traded funds” were the widgets being manufactured; and the ultimate product was more money. As a friend of mine who works in CDOs once told me, the wealth being produced in finance is extractive, because the banks are just shuttling cash from one party to another and skimming a percentage off the top (otherwise known as a “vig”). And because America had all this money lying around, we figured we would just buy products made abroad as long as the financial industry kept making all that dough, which lead to the staggering trade deficits we have today.
Finally, the real 800-pound gorilla in the room: America is a victim of its own success. We lionized a financial industry whose success was to due to good old fashioned virtues like “innovation” and “competition.” I can’t find a better quote on this point than John McCain’s op-ed in the September/October 2008 issue of Contingencies:
Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.
The financial industry was just doing its job, and they were damn good at it, too. It’s only when things are bad that we feel it is politically safe to examine that success. After 9/11, increased consumer spending was actually defined as our patriotic duty. And the “democratization of credit” meant that even if you couldn’t actually afford it, you could put your national pride on a credit card at rates which were legally considered usury a generation ago.
And for many years, the divorce between Wall Street and Main Street worked. The economy tanked in ways that only mattered to working people—real wages stagnated or fell, unemployment soared, unions were smashed, private health care costs soared, gas prices rose, college became more expensive, and government assistance dried up. But as long as you had a 401(k) that was heavily invested in the stock market, you were theoretically doing great! Damn the torpedoes, as we used to say.
The American economy became governed by cartoon physics, and we’ve been running flat-out over a cliff for the last few years. When free-marketists finally looked down into thin air, the fake populism began: suddenly it was “greed on Wall Street” which was to blame. Saying there’s greed on Wall Street is like saying there’s pavement on Wall Street. McCain recently decried the “casino culture” in the stock market, but still makes maintaining the capital gains tax at 15% a central part of his platform. As Fortune wrote in a profile of McCain’s Phil-Gramm influenced economic policies all the way back in February of this very year,
Now that the faltering economy has replaced national security as the overriding issue in the presidential campaign, John McCain is portraying himself as a budget-shrinking, flat-tax-embracing, healthcare-privatizing champion of free markets. …economic conservatives should take heart. McCain’s chief economic adviser – and perhaps his closest political friend – is the ultimate pure play in free market faith, former Texas Senator Phil Gramm.
As if all this weren’t enough, the actual lifeblood of America is still petroleum. We’ve had since the oil shocks of the late 1970’s to get off of it (which we did in terms of electricity generation; your car still runs on gas). We built the interstate and an entire suburban way of life based on government-subsidized white flight, cheap oil and profligate consumption of everything else. We dismantled public transit and subsidized the American auto industry so that they could build bigger and badder cars.
I met some well-intentioned folks a party recently and we got to talking about renewable energy. My new friends maintained that we don’t need oil or coal anymore because renewable energy was now abundant enough to replace fossil fuels. I said I wished I could agree, but it’s simply not true yet. The problem isn’t that we can’t produce enough renewable energy; it’s that we consume too much energy in the first place. Americans buy six times as much oil as the world average. Americans consume over 100 quadrillion BTU’s of energy a year, more than Europe and Africa combined. As long as our economic well-being is identified with continued growth, we will have to support growth in a variety of reckless methods, many of which are coming home to roost. For some reason conservatives are now harping about the greatest transfer of wealth in history—from America to oil producing countries. Well, they figured this out just in time not to be able to do anything about it.
It’s not just oil that is becoming scarce, it’s all kinds of natural resources. Even when it comes to nitty-gritty of solar panel manufacturing you see this problem. The world may run out of gallium and other crucial rare-earth semi-conducting metals in a few years:
But now comes word that it isn’t just wildlife that can go extinct. The element gallium is in very short supply and the world may well run out of it in just a few years. Indium is threatened too, says Armin Reller, a materials chemist at Germany’s University of Augsburg. He estimates that our planet’s stock of indium will last no more than another decade. All the hafnium will be gone by 2017 also, and another twenty years will see the extinction of zinc. Even copper is an endangered item, since worldwide demand for it is likely to exceed available supplies by the end of the present century.
So, regardless of how we got here, what should we do now? Good thing I’ve been writing a book about it for the last three years.