[R-G] [BillTottenWeblog] Want to Save the Economy?

[Bill Totten]

Spread the Wealth and Give Workers a Raise

by Mike Whitney

CounterPunch (Apri1 12/13 2008)


Insolvency's dark shadow hangs over Wall Street. One major player, Bear
Stearns, has already gone under, and from the looks of it, another
investment giant may be on the way down. It's getting ugly out there.
The so-called TED spread {*}, which measures the reluctance of banks to
lend to each other, has begun to widen ominously suggesting that the
money markets think another dead body will be floating to the surface
any day now.
____________________

{*} Initially, the TED spread was the difference between the interest
rate for the three month US Treasuries contract and three month
Eurodollars contract as represented by the London Inter Bank Offered
Rate (LIBOR). However, since the Chicago Mercantile Exchange dropped the
T-bill futures, the TED spread is now calculated as the difference
between the T-bill interest rate and LIBOR. The TED spread is a measure
of liquidity and shows the flow of dollars into and out of the United
States (Wikipedia).
____________________

The ongoing deleveraging of financial institutions and the persistent
downgrading of assets has the Fed in a tizzy. Bernanke has backed
himself into a corner by stretching the Fed's mandate to include
everyone on Wall Street with a mailing address and a begging bowl. Now
he's taken on the even larger task of fixing the plumbing that keeps
credit flowing between the various investment banks. Good luck. There's
plenty of more pain ahead. The IMF expects the final tally will be $945
billion, that means $3 trillion in lost loans for the banks. Bernanke
better pace himself; this mess could last for years.

The US subprime fiasco has spiraled into what the IMF is calling "the
largest financial shock since the Great Depression". America's capital
markets are on the fritz. The corporate bond market is frozen, the banks
are buckling from their losses, and the housing market is in a shambles.
No one is buying and no one is lending. Private equity deals are off 75
per cent from last year and no one will touch a mortgage-backed security
(MBS) with a ten foot pole. The mighty wheel of modern finance is
grinding to a standstill and no one's quite sure how to rev it up again.

The US consumers are feeling the pinch, too. Credit cards are maxed out,
student loans overdue, car payments in arrears, and mortgages entering
foreclosure. Also, wages haven't kept pace with production and and the
home-equity ATM has been shut down. Now that the credit tap has been
turned off; the American worker is hurting, but no one is offering a
bailout or a even helping hand; just a few table-scraps from Bush's
"surplus package". 500 bucks will just about fill the tank of a
normal-sized SUV. A new survey from the Pew research Center "Inside the
Middle Class - Bad Times Hit the Good Life", shows that working families
are in debt up to their ears and that fewer Americans "believe they are
moving forward" than anytime in the last half century. The study also
shows that most people believe "it's harder to maintain a middle class
life style" and that "since 1999, they have not made economic gains".
Average families are struggling just to make ends meet.

That's why so many people bought homes when they should have opened
savings accounts. They were duped into speculating on housing so they
could get a chunk of money. It looked like a good way to overcome
stagnant wages and crappy hours. The cheer-leading TV pundits offered
assurances that "housing prices never go down". It was all baloney. Now
fifteen million homeowners are upside-down on their mortgages and the
very same experts are scolding workers for fudging the facts on their
income disclosure forms. It's all backwards.

No wonder consumer confidence has dropped to record lows. Working people
don't need lectures on saving money; they need a raise. The big-wigs at
Bear Stearns are still dining on crab-cakes at the Four Seasons while
the working folk are just trying to make their way through Greenspan's
nuclear winter living on beef jerky and Big Gulps. Where's the justice?

Volumes have been written about the current crisis; subprime this,
subprime that. Everything that can be said about collateralized debt
obligations (CDOs) credit default swaps(CDS) and mortgage-backed
securities (MBS) has already been said. Yes, they are exotic "financial
innovations" and, no, they are not regulated. But what difference does
that make? There's always been snake oil and there have always been
snake oil salesmen. Greenspan simply raised the bar a notch, but he's
not the first huckster and he won't be the last. What really matters is
underlying ideology; that's the root from which this economy-busting
hydra sprung. Thirty years of trickle down, supply-side gibberish;
thirty years of idol worship for the waxy-haired reactionary, Ronald
Reagun; thirty years of unrelenting anti-labor, free market, deregulated
orthodoxy which inflated the biggest equity-Zeppelin in history.

Now the bubble is hissing out of the blimp and the escaping gas is
wreaking havoc across the planet. There are food riots in Haiti, Egypt,
and Kuwait. Wherever the local currency is pegged to the falling dollar,
inflation is soaring and trouble is brewing. Also, European banks are
listing from the mortgage-backed garbage they bought from brokerages in
the US and need central bank bailouts to stay afloat. It's just more
fallout from the subprime swindle. Finance ministers in every capital in
every country are getting ready for a 1930s-type typhoon that could send
equities crashing and food and energy prices rocketing into the
stratosphere. And it can all be traced back to the wacko doctrines of
neoliberalism. These are the theories that guide America's
"screw-thy-neighbor" monetary policies and spread financial turmoil to
every city and hamlet around the world.

The present stewards of the system are incapable of fixing the problem
because they represent the interests of the people who benefit most from
the disruptions. Paulson's latest "blueprint" for the financial markets
is a good example; a more pro-business, self-serving scheme has never
been put to paper. Gary North sums it up in his article "Really Stupid
Loans":

"With the Federal Reserve System's latest proposal, presented to the
public by Secretary of the Treasury Henry 'Goldman Sachs' Paulson, the
Fed is asking the United States government to make it the Great
Protector of Capital ... The new proposals will centralize power over
finance in the hands of an agency that is officially run by the
government but in fact is run by agents of the largest fractional
reserve banks ... Regulation by tenured staff economists will not make
the system less fragile. It will make it more top-heavy and less
flexible ...

"Some version of this plan will probably pass in the next Congress. No
matter whether it does or does not, the direction is the same: toward an
economy controlled by the federal government in conjunction with titular
private ownership of the means of production, that is, toward fascism."

-- Gary North, "Really Stupid loans", lewrockwell.com


The whole point is to put the markets in the Fed's control so that when
the next financial crisis arises (from the next swindle) the Fed can
bailout the bankers and hedge fund managers without consulting Congress.

Paulson's plan is a power-play; nothing more. The investment Mafia wants
to take over the whole financial system lock, stock and barrel. They
want to liquidate the SEC and any other government watchdog and put the
investment banks, hedge funds and brokerages on the honor system. It's
the end of transparency and accountability which, of course, are already
in short supply.

Currently, Paulson and Bernanke are expanding the balance sheets of the
Government Sponsored Enterprises (GSEs) so that Fannie Mae and Freddie
Mac will underwrite 85 per cent of all mortgages while FHA will cover
ten per cent more. The mortgage industry is being nationalized to save
banking fellowship while the taxpayer is on the hook for another $4.4
trillion of dodgy loans. Paulson doesn't care if the taxpayer gets stuck
with the bill. What bothers him is the prospect that, somewhere along
the line, workers will demand higher wages to keep pace with inflation.
Then all hell will break loose. Paulson and Company would rather see the
economy perish in a deflationary holocaust than add another farthing to
a working person's salary. He and his ilk take class warfare seriously;
that's why they are winning. But their strategy also creates problems.
When wages don't keep pace with production, demand decreases and the
economy falters. That's what's happening now and Paulson knows it.
Workers are over-extended and can't buy the things they make. They
barely have enough to feed the kids and fill the tank for work. Consumer
spending (which is 72 per cent of GDP) is nose-diving at the very same
time the Fed's equity bubble is exploding.

Neoliberalism has a twenty-year record of producing the very same
economic calamities. Why is this crisis different? Why should the US be
spared the same predatory treatment as the many other victims of the
global corporate oligarchy? After the Fed's equity bubble bursts, the
corporate vultures will swoop down and buy up vital resources and
industries for pennies on the dollar.

Economist Michael Hudson anticipated many of the present-day
developments in the financial markets in an amazingly prescient
interview in CounterPunch in 2003 called "The Coming Financial Reality":

Michael Hudson: "Free enterprise under today's financial conditions
threatens to bring about an unprecedented centralization of planning,
not in the hands of government but by the financial conglomerates and
money managers. Whatever government planning power is destroyed becomes
available for them to appropriate, with plenty of vigorish left for the
politicians whose campaigns they back and who will 'descend from heaven'
into high-paying private-sector jobs, Japanese style, after having
performed their service for the new regime."

Question: The financial regime is nothing but parasites?

Michael Hudson: "The problem with parasites is not merely that they
siphon off the food and nourishment of their host, crippling its
reproductive power, but that they take over the host's brain as well.
The parasite tricks the host into thinking that it is feeding itself.

"Something like this is happening today as the financial sector is
devouring the industrial sector. Finance capital pretends that its
growth is that of industrial capital formation. That is why the
financial bubble is called 'wealth creation', as if it were what
progressive economic reformers envisioned a century ago. They condemned
rent and monopoly profit, but never dreamed that the financiers would
end up devouring landlord and industrialist alike. Emperors of Finance
have trumped Barons of Property and Captains of Industry."

-- Michael Hudson, interviewed by Standard Schaefer, "The Coming
Financial Reality", CounterPunch (2003).


Bingo. Hudson not only explains how finance capitalism is inserting
itself into the governmental power structure but, also predicts that
"industrial capital formation" - which is the production of things that
people can really use to improve their lives - will be replaced with
complex debt instruments and derivatives that add no tangible value to
people's lives and merely serve to expand the wealth of an entrenched
and increasingly powerful investor class.

Finance capitalism has "devoured landlord and industrialist alike" and
created a galaxy of seductive liabilities which masquerade as assets.
Derivatives contracts, for example, represent over $500 trillion of
unregulated counterparty transactions; a "shadow banking system"
completely disconnected from the underlying "real" economy, but large
enough to send the world into a agonizing depression for years to come.

The goal should be to dismantle this corrupt Ponzi-system, which merely
wraps debt in a ribbon, and rebuild the economy on a solid foundation of
productive labor, worker solidarity and, above all, the redistribution
of income and hence purchasing power away from the system which now flow
to the top two or three per cent.

Political power has to be taken from the financial mandarins or the
disparity of wealth will continue to grow and democracy will wither.
We've already seen our main institutions - the courts, the congress, the
media, and the presidency - polluted by the steady flow of corporate
contributions which only serve the narrow interests of elites.

Henry Liu expands on this idea in his excellent article "A
Panic-stricken Federal Reserve":

"In the 1920s, the wide disparity of wealth between the rich and the
average wage earner increased the vulnerability of the economy. For an
economy to function with stability on a macro scale, total demand needs
to equal total supply. Disparity of income eventually will result in
demand deficiency, causing over-supply. The extension of credit to
consumers can extend the supply/demand imbalance but if credit is
extended beyond the ability of income to sustain, a debt bubble will
result that will inevitably burst with economic pain that can only be
relieved by inflation ... More investment normally increases
productivity. However, if the rewards of the increased productivity are
not distributed fairly to workers, production will soon outpace demand.
The search for high returns in a low demand market will lead to consumer
debt bubbles with wide-spread speculation ... Today, outstanding
consumer credit besides home mortgages adds up to about $14 trillion,
about the same as the annual GDP."

Voila. A strong economy requires a strong workforce and an equitable
distribution of wealth. When money is concentrated in too few hands, the
political system atrophies and becomes unresponsive to the needs of its
people. That's when the nation's laws and institutions are reshaped to
reflect the ambitions of rich and powerful.

The financial system is doing exactly what it was designed to do, it is
crumbling from the decades-long trickle-down experiment. Social programs
have been gutted, civil infrastructure is in tatters, legal protections
have been savaged, and workers rights have been trounced. Is it any
wonder why we're embroiled in an unwinnable war and the financial system
is on its last legs?

The only way to break the stranglehold of Wall Street's financial
Politburo is to level the playing field through greater wealth
distribution. That's the best way to rekindle democracy and make America
the land of opportunity again. And it all starts with giving America's
workers a raise.
_____

Mike Whitney lives in Washington state. He can be reached at:
fergiewhitney at msn.com

http://www.counterpunch.org/whitney04122008.html

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