Fantasy Finance and Real Fixes

[davidswanson]

If you're like me you find it at least a bit disturbing that we're giving trillions of dollars to save the economy to the very people who wrecked it, and more disturbing that we're doing so without any solid basis for expecting to get much of it back and without making fundamental changes to prevent a repetition. But if you're like me, you also aren't 100 percent certain how a credit default swap works with a cubed collateralized debt obligation, much less whether such a monstrosity needs to be eliminated or reformed. What to do?

Well, a coalition of concerned citizens called "A New Way Forward" ( http://anewwayforward.org ) is organizing teach-ins everywhere on June 10th ( http://anewwayforward.org/demonstrations ) and if you don't have people who feel up to the role of teachers, or even if you do, there's a terrific video at that website to download, show, and discuss. Just doing this much will make you more confident in discussing the single largest transfer of wealth any of us have seen, and it will connect you with others who share your concerns as well as your hesitations. There is also a wonderful collection of articles and books available on the right hand side of this page: http://anewwayforward.org/blog

A New Way Forward has digested this information and arrived at three proposals:

"NATIONALIZE: Experts agree on the means -- Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts.
REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.
DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place-- new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function."

I'm inclined to agree with those general ideas, but I've also just read an excellent new book that takes a broader view and offers broader solutions while calling into doubt the idea that the fixes listed above will be sufficient on their own. I recommend adding to any financial shenanigans reading list "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," by Les Leopold. The introduction to this book ends thus:

"And then there's the subprime-mortgage puzzle. The financial media has all but concluded the crash was caused by risky mortgages taken out by poor people and deadbeats who couldn't afford them, and issued by reckless lenders who should have known better. About $1.3 trillion worth of such mortgages are out there. Of that, about $300 billion are in default or nearly so…. Please, can someone explain how that amount (about 2 percent of household net worth, could devastate the world's financial system? To date, the taxpayer has put up about $2 trillion in bank bailouts and loan guarantees. Why didn't that take care of the problem long ago? Like some perverse modern-day miracle of fishes and loaves, how did $300 billion of bad debt multiply into trillions of dollars in financial toxic waste? Poor people did all that? In this book I go after these questions -- and I hope the answers will tell us a good deal about our economic woes and what to do about them. At the very least, I hope to contribute modestly to our collective financial literacy. In short, if I can understand this crap, so can you."

And you really can and it's really worth doing. The bulk of "The Looting of America" is devoted to the explanation of what's happened. And the root cause turns out not to be deregulation or oversized banks or a lack of accountability for fools and crooks, although all of those things helped. The tragic flaw in the system turns out to be the now-thirty-year-old divergence of productivity and income, the denial of a steady share of our own earnings to working people, the gradual transfer of great sums from the rest of us to a very small group of extremely wealthy people. Of course, such a transfer of wealth might seem offensive, but how could it actually cause the situation in which we needed to transfer another huge pile of wealth to the same people through our government? Well, essentially we created a situation in which investors couldn't find anything in the real economy to invest in anymore. All the real stuff was already invested in. Had someone created a way to invest in new industries, infrastructure, green energy, and mass transit, we might all be smiling about it now. Instead, investors figured out ways to invest in fantasies, to make bad investments look good, and to gamble other people's money on the fate of yet other people's investments without investing in anything real at all.


Credit: http://www.dilbert.com

So, when Leopold comes to his recommendations at the very end of the book, some of them may sound familiar and others harebrained, unless you've read the preceding chapters, in which case they all sound sensible or newly strengthened. The recommendations include (in a list I've created by pulling ideas out of the text):
1-Financial disaster insurance: we should collect premiums (or taxes) from all financial transactions to sure up the real economy against the next collapse of the fantasy one by investing in infrastructure and all the useful real investments that those with too much money on their hands don't always manage to find or create on their own.
2-Without expecting that we can prevent the next bubble and burst, we should attempt to lessen it by establishing a Financial Product Safety Commission that would ban dangerous financial "products" like collateralized debt obligations. Any product too difficult for skilled regulators to comprehend would be banned for that reason alone.
3-Undo the transfer of the wealth from our increased productivity: "If each billionaire inside the casino walked out with 'only' $100 million per person, they would leave $1.52 trillion sitting on the table. If these chips landed in the public coffers, let's say via steeply progressive income and wealth taxes, we could invest $150 billion a year in developing and deploying renewable energy alternatives -- ten times what President Obama called for during his campaign. Or we could provide free tuition for every student at every public college and university -- in perpetuity."
4-Re-unionize. Permit it by passing the Employee Free Choice Act.
5-Cap the salaries at any financial company taking government money at the salary level of the U.S. president ($400,000). Or do that for all companies taking public handouts.
6-Create single-payer health coverage, which would provide a significant stimulus to the economy.
7-Create a maximum wage.
8-Raise the minimum wage.

Another central concern for many worried about our financial fate is the role played by the Federal Reserve, which someone rightly remarked is no more federal than Federal Express. It's a private company running our financial policies and inventing and distributing money. Not only does the Constitution place such powers in Congress, but the Congress is currently not even permitted to know what the Fed is up to. It would be, however, if H.R. 1207, the Federal Reserve Transparency Act of 2009, were to pass the House of Representatives and an unprecedented avalanche of public pressure force the Senate to miraculously go along. The House bill has 179 cosponsors plus one sponsor. That's almost unheard of. No bill has that many cosponsors. It only takes 218 votes to pass. So, if we could get 38 more cosponsors we'd be getting somewhere. Here's a page on which to take action:
http://action.firedoglake.com/page/s/Fed1207

(And, by the way, applause to my congressman Tom Perriello who has signed onto this -- the second thing he's ever done that I applauded.)

There's also a particular regulation that ought to be enforceable and in fact used to be enforced fairly well, that would limit the ability of the non-working class to rip the rest of us off. I'm talking about a ban on usury. There are bills in both houses of congress to limit the interest that creditors can charge. Senator Bernie Sanders' bill (S. 582) would limit interest to 15 percent. Even those who believe we would all perish if billionaires had to fly on the same airplanes as other people and couldn't purchase that third yacht might support the idea of limiting the interest on their own credit cards to 15 percent. Surely the masters of the universe can make a dishonest living at 15 percent the same as at 22 percent or 400 percent, right? Now would be a good time to call your senator and representatives.

[puebloknot]

1. K&R "Crazy right wingers" have been telling us forever that the Fed ...

... is a private corporation with too much control over our financial lives. Now, We, the Rational, get to increasingly take a peek behind the curtain to see how our financial universe really operates.

[clear eye]

2. K & R

Been saying all of this in bits and pieces since last August (can be seen in my diary archives), but not as well. As for the banks needing new insurance, Robert Rubin et.al., around 2002 pressured the SEC to drop all regs that required banks to have assets to back their investments and loans and twisted the arms of the European finance ministers and major bankers to allow them to do international business w/o these regs that were still required of European banks. And yes, a relatively finite amount of bad mortgages was multiplied into an infinite amount of credit default swaps that were simply fraudulent, but everybody assumed that they, personally, weren't understanding them properly or were afraid to say that the emperor had no clothes. For decades progressive economists were saying that with real productive wealth declining the U.S. was riding for a serious fall. The mystery is how we kept going in relative comfort for so long. One of the most discouraging aspects of this is the refusal to invite even a single one of the most respected progressive economists into this Administration. H.R. 1207 sounds very good, although massive damage has already been done. A more pragmatic centrist economist on Bill Moyers the other week said, in the absence of major restructuring and reregulation of the financial sector (he didn't say "and more taxation of the ultra-wealthy") this administration seems to expect to save the banks by inflation. In other words, the banks and federal gov't (us) would owe less real money. The obvious problem with that solution is that it says to every middle- or working class person who's diligently saved for their old age in dollars and worked years to accumulate a pension, "Let them eat cake," as the value of their savings and income dwindles away.

Another overlooked elephant in the room is that despite endless flows of borrowed cash into the banks, they will not become solvent until the business of loaning money is profitable again. That won't be achieved by raising credit card rates until everyone defaults. It will only be achieved by a more productive economy. The recommendation to help by passing single-payer is an essential part, but redirecting the federal spigot to the real economy is so obvious as to be painful. That's why listening only to the amplified cries of a handful of discomfited bankers, instead of to the economic spokespeople for the drowning populace is so wrongheaded as to be immoral.

I do doubt that the transparency law even if passed would be enforced by this administration, going by the appointment of Geithner and by who the economics advisors are. I can just picture future Congressional hearings producing revelations of what the Fed will have been hiding, and no way being found to make them stop doing it.

There really is only one action that can be taken that I think would bring any of the desperately needed measures you speak of into consideration by this government, and that would be a huge coalition of citizen groups organizing a multi-day national strike. And planning more if the first one isn't taken seriously. Unfortunately all related issue groups seem to want to directly solicit a membership base for funds, and nobody wants to take on the role of umbrella group, needing to convince the other groups that there is a real advantage to supporting it for the sake of unified action. Someday the desperate straits to which we have fallen will drive us to do the obvious. The sooner the recognition comes, the sooner the country can be moved to right its financial structure, and the less needless death and suffering there will be.

[Greyhound]

3. Oh hell yes! K&R

Yet another clear voice attempting to drag Americans out of their determined ignorance of all things financial/economic.

Every proposal in the OP has been brought up time and again here and in media around the world, but our "leaders" from Congress to the administration will not hear it, speak of it, nor consider it. Will anything short of violence move them?
:grr:

[hfojvt]

4. some of that is redundant

"3-Undo the transfer of the wealth from our increased productivity: "If each billionaire inside the casino walked out with 'only' $100 million per person, they would leave $1.52 trillion sitting on the table. If these chips landed in the public coffers, let's say via steeply progressive income and wealth taxes, we could invest $150 billion a year in developing and deploying renewable energy alternatives -- ten times what President Obama called for during his campaign. Or we could provide free tuition for every student at every public college and university -- in perpetuity."
4-Re-unionize. Permit it by passing the Employee Free Choice Act.
5-Cap the salaries at any financial company taking government money at the salary level of the U.S. president ($400,000). Or do that for all companies taking public handouts.
6-Create single-payer health coverage, which would provide a significant stimulus to the economy.
7-Create a maximum wage.
8-Raise the minimum wage."

once you have #3 - steeply progressive income taxes, you probably do not need #5 salary caps and #7 maximum wage. With a 70% top marginal rate, like we had in the 1960s and 1970s, then going from a salary of $5 million to $10 million adds less than $1.5 million to take-home pay. That's a big disincentive to ballooning salaries. #4 and #8 also overlap, since more unions should create an upward pressure on wages. We just recently increased the minimum wage, not to the level it was in the 1960s, but I think a sudden jump to $10 or $11 an hour might do some harm.

[LongTomH]

5. K & R & Forward

:dem: :kick: :kick: :kick:

[Greyhound]

6. Kick. n/t

[Greyhound]

7. I just hate that even here nobody wants to look at, let alone learn, anything

about our economic system. We're being robbed in broad daylight by the police in front of City Hall and nobody cares.

[PufPuf23]

8. Wise post. Links work now too. Thanx. ny