By Mike Whitney
November 03, 2008 “Information Clearinghouse”
Redistribution is never an issue when the money is flowing upwards. It’s only when working people are poised to get a few scraps that all hell breaks loose. That’s when self-styled “mavericks” and their political cadres spring into action and unleash their vitriol at anyone who challenges the failed “trickle-down” dogma of the investor class. When Barak Obama naively pointed out the need to “spread the wealth” the media descended on him like a pack of feral hounds. The gaffe was followed by weeks of derision and vicious attacks. McCain branded him a the “Redistributionist-in-Chief” while his rabid friends on wingnut radio invoked the musty specter of Karl Marx.
What a load of malarkey. Neither McCain nor his media pals mention how the nation’s wealth has already been “redistributed” via unfunded tax cuts for the rich, gluttonous $634 billion Pentagon budgets, or trillion dollar bailouts for Wall Street sharpies. That’s why the national debt has skyrocketed to $11.3 trillion and the country is on the brink of default. It has nothing to do with the proposed extension of unemployment benefits for the victims of the financial crisis or the prospect of $300 billion in additional stimulus to revive the moribund economy. The Bush administration would never hand out stimulus checks unless it had a gun to its head. But, the fact is, their plan to shift the nation’s wealth to the richest 1 percent of the population has been such a glorious success, that consumer spending has seen its sharpest decline in history. Demand has collapsed. And, even though the Federal Reserve has dropped the Fed Funds rate to 1 percent, has flooded the financial system with liquidity, (Federal Reserve Credit jumped $69.6bn to a record $1.873 TN, with a historic 7-wk increase of $985bn!) and is providing a backstop for money markets, commercial paper, insurance companies, investment banks, real estate, and dodgy mortgage-backed securities; consumers are continuing to lose ground because of falling home equity, exploding personal debt, and growing job losses. The Fed’s liquidity-injections are not getting to the people who need it most–the workers– so the economy is tanking. It’s that simple.
So what should be done?
Whoever becomes the next president will have to rethink traditional views on redistribution. It’s not a dirty word. The only way to stop the bleeding and save the country from economic ruin is by enacting an aggressive program to rebuild the middle class. Stimulus checks and government-funded infrastructure programs simply ignore the more deeply-rooted systemic and ideological problems. What’s really needed is a reversal of 3 decades of Reaganism and an admission that that flawed “supply side” market-based doctrine has thrust the country towards financial annihilation. Market fundamentalism has increased the share of national wealth among the richest 1 percent to the highest point since the Gilded Age. “The wealthiest 1 percent of Americans held more than half the nation’s direct holdings of publicly traded stocks in 2004 according to the Federal Reserve”. (Wall Street Journal) Those figures have ballooned since 2004 and created the same kind of economic polarization that exists in third world countries. A recent report by the Organization for Economic Cooperation and Development (OECD) showed that “The United States has the highest inequality and poverty rates in the 30-country organization after Mexico and Turkey, and the gap has increased rapidly since 2000…In the United States, the richest 10 percent earn an average of $93,000, the highest level in the group. The poorest 10 percent earn an average of $5,800 – about 20 percent lower than the OECD average.” Neoliberalism in America has triumphed; the middle class is busted!
The American worker needs an “across the board” pay raise, greater union representation, and a seat on the corporate board. Stimulus checks are a quick-fix with no enduring value. What’s needed is structural change and decisive action to redirect wealth away from America’s burgeoning oligopoly to the worker bees whose labor keeps the system running. That means the markets have to be strictly regulated, taxes have to increase for anyone making over $250,000 per year, and workers wages will have to surpass the rate of inflation. The best way to rev-up the economy is to rebuild the middle class so they can buy the things that American businesses produce.
Marriner Eccles, who served as FDR’s chairman of the Federal Reserve summed it up like this:
“As mass production has to be accompanied by mass consumption. Mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery.”
Eccles was an astute economist who understood the negative effects of overcapacity and demand destruction. When wages fail to keep pace with production, the system becomes unstable and crisis-prone. Credit expansion only adds to the problem making the ultimate meltdown even worse. When peak credit is reached, borrowers can no longer make the interest payments on their loans and the bubble begins to unwind. That’s the situation we’re in right now.
October was the worst month on record for global stock markets. Even the blue chips got hammered. Gold, oil, retail, and durable goods have all dropped significantly. Deflation has wrapped itself around the economy like a python and is causing declines in every asset-class. New York Times journalist Peter Goodman summed it up like this:
“The economy has taken a turn for the worse, big time,” said Allen Sinai, chief global economist for Decision Economics, a consulting and forecasting group. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere.”
Economists saw in the data a testament to the degree to which many households are so strapped that the very culture of American consumption has been altered. (“Economy shrinks with consumers leading the way”, Peter Goodman, NY Times)
The stock market fell more than 30 percent in October, commodities recorded their worst month in half a century, credit markets are still underperforming, and consumer confidence is at all-time lows. In fact, according to a CNN/Opinion Research Corp. poll:
“Three-quarters of U.S. residents believe things are going badly in the United States and large majorities are angry and frightened… The poll found that two-thirds of those questioned said they were scared about the way things are going while three of four, 75 percent, said conditions in the United States are “stressing them out.”
“It’s scary how many Americans admit they are scared,” said Keating Holland, the broadcaster’s polling director. “Americans tend to downplay the amount of fear they have when facing tough times. The fact that more than six in 10 say that they are scared shows how bad things are getting.” (CNN: “Most in US Scared and Angry”)
Americans are scared and for good reason. Government policy is being concocted by a Mafia of right wing corporatists, Wall Street tycoons, and strident Chicago-school class warriors. Their interests are different then the people they are supposed to serve. Financial-industry rep Henry Paulson has devoted all his time to saving his banker buddies while maxed-out workers slip further into debt and destitution. Of the more than $1 trillion the Fed has spent to prop up the financial system, not one dime has gone to anyone who wasn’t a banker. It’s all gone to Paulson’s friends. Meanwhile, the economy is sliding into the most severe recession in the last 80 years and there’s no help in sight for homeowners who are underwater on their mortgages or about to lose their jobs.
The surest way to destroy the economy is to hand over control of the financial system to investment banks and speculators. That’s what transpired before the Great Depression and Wall Street has restaged the same coup today. By overturning critical market regulations, the investment alchemists have created a toxic stew of exotic debt-instruments, shadowy off-balance sheets operations, and opaque derivative contracts, all designed to avoid prudent capital requirements. The investment banks and hedge funds have been creating credit from thin air while supportive regulators in the Bush Administration have applauded from the sidelines. Now the monstrous equity bubble has imploded triggering systemwide deleveraging which has left consumers with little access to credit, soaring food and fuel costs, and an uncertain jobs market. Naturally, demand has suffered as people hunker down and try to prepare for the economic slump ahead. Here’s how Franklin Roosevelt summed it up nearly a century ago:
“…Our basic trouble was not an insufficiency of capital. It was an insufficient distribution of buying power coupled with an over-sufficient speculation in production. While wages rose in many of our industries, they did not as a whole rise proportionately to the reward to capital, and at the same time the purchasing power of other great groups of our population was permitted to shrink. We accumulated such a superabundance of capital that our great bankers were vying with each other, some of them employing questionable methods, in their efforts to lend this capital at home and abroad. I believe that we are at the threshold of a fundamental change in our popular economic thought, that in the future we are going to think less about the producer and more about the consumer. Do what we may have to do to inject life into our ailing economic order, we cannot make it endure for long unless we can bring about a wiser, more equitable distribution of the national income.” (Pam Martens, “FDR Explains the Crisis: Why it feels like 1932” Counterpunch)
$13 trillion has already been drained from global markets as the humongous credit bubble continues to lose altitude. Trillions more will be provided to keep the listing financial system afloat. Who will provide the crumbs to working people when production slows, credit contracts, profits shrink, businesses default, home equity vanishes and unemployment soars? So far, Paulson has shrugged off the idea of another stimulus package and dragged his feet on the FDIC’s plan to rewrite mortgages to slow the rate of foreclosures. All of the Treasury Secretary’s energy has been devoted to transferring the nation’s wealth to his Wall Street colleagues. (Now that’s redistribution!) Similarly, Fed chief Bernanke (who approved every one of Greenspan’s misguided initiatives) has shown more interest in defending the shabby and “unsustainable” structured finance system than finding ways to help hard-pressed workers. Just last week, Bernanke defiantly made a speech in which he defended “securitzation”–the sale of chopped up mortgages as securities–which caused the present meltdown. Bernanke stated:
“The ability of financial intermediaries to sell the mortgages they originate into the broader capital market by means of the securitization process serves two important purposes: First, it provides originators much wider sources of funding than they could obtain through conventional sources, such as retail deposits; second, it substantially reduces the originator’s exposure to interest rate, credit, prepayment, and other risks associated with holding mortgages to maturity, thereby reducing the overall costs of providing mortgage credit.”
What gall. So Bernanke would restore the same system and create the very same risks, just so he could “reduce the originator’s (the banks) exposure” and generate greater profits for Wall Street investment banks? Is Congress so out of touch with reality that they can’t see the threat that Bernanke poses. This is madness in the extreme.
“We cannot allow our economic life to be controlled by that small group of men whose chief outlook upon the social welfare is tinctured by the fact that they can make huge profits from the lending of money and the marketing of securities–an outlook which deserves the adjectives ‘selfish’ and ‘opportunist.’ ” (Pam Martens, “FDR Explains the Crisis: Why it feels like 1932” Counterpunch)
The bubble that is now deleveraging started with the Fed’s low interest monetary policies which subsidized debt and rewarded speculation. The massive expansion of credit by the investment banks and hedge funds distorted the market by keeping the price of money “too low for too long” pushing savers into risky investments. That ignited asset-inflation in the secondary market and sent real estate prices skyrocketing. Now that foreclosures are steadily rising, the foundation for the scheme has eroded and the pyramid is crashing to earth.
Libertarians and conservatives tend to blame the crisis on working people who took out mortgages that were beyond their ability to pay. But that is not where the responsibility lies. Bankers fully grasp the science of lending money. If that wasn’t the case, then why does the Fed lower interest rates when it wants to stimulate the economy? It’s because they know that the allure of cheap money creates an incentive for speculation that seduces borrowers into spending money they don’t have for things they don’t need. Debt-burdened homeowners are just the victims of a nationwide banker’s scam. They are not to blame.
The only way to rebalance the economic system and mitigate the effects of a deep recession, is to admit we’re on the wrong track and make the necessary course correction. So far, the main recipients of the US taxpayers’ largess–the banks–have already acknowledged that they will not use the bailout money to provide credit to consumers and businesses as intended, but will divert their windfall into bonuses for their employees, dividends for their shareholders and to buy-up weaker banks. On top of that, no criminal charges have been filed against any of the main players who engineered the biggest incident of securities fraud in history. The banks and hedge funds will not have to return any of their ill-gotten gains. Given the power and influence of the financial lobby, how else can one put the economy on even-keel, rekindle flagging demand, and rebuild the middle class without an aggressive plan to redistribute the wealth? (Restoring the Truman-era 93 percent marginal tax on anything over $250,000 would be a step in the right direction)
Novelist Honore d’Balzac said, “Behind every fortune is a crime”. The perceptive Frenchman must have anticipated the gaggle of venal money-grubbers who currently occupy the penthouse suites in lower downtown Manhattan. There’s only two ways to deal with selfishness and cynicism on this scale; regulation and taxation. Nothing else will work.
Obama’s Little Red Book
Presidential candidate Barak Obama is more Milton Friedman than Chairman Mao, but there is room for hope. In an interview with Chicago Public Radio station WBEZ-FM, Obama noted that the Supreme Court under Chief Justice Earl Warren “never ventured into the issues of redistribution of wealth and sort of more basic issues of political and economic justice in this society,” and “to that extent as radical as I think people tried to characterize the Warren Court, it wasn’t that radical”.(Wall Street Journal)
Hmmm. Perhaps, an Obama presidency wouldn’t be so bad after all.
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