In the not too distant past, bankers, financiers and investors could do no wrong. They were the wizards of Wall Street, ushering in a new era of economic expansion. But by around 2006, it became very clear their magic was just an illusion. The only thing real was millions of homeowners defaulting, millions of pensioners watching their 401Ks evaporate and millions of workers losing their jobs.
Investors and bankers didn’t fare nearly as bad. They seemed to just shut down their old hustle, moved on down the road and reopened for business as if nothing had happened. Billionaire Warren Buffet’s two rules to investors were in full force and effect and backed up by the U.S. Treasury: “Number one rule is to never lose money and number two rule is to never forget rule number one.”
In fact, big business pretty much made up its own rules during the last three decades.
Taxes for corporations and the wealthiest were continually lowered and regulatory obstacles to domestic and offshore investments were eliminated. At the same time, conversely, wages for the majority remained stagnant since 1973.
Not surprisingly, a dramatic shift in wealth occurred during this time. Forbes magazine lists the 400 wealthiest Americans with a total net worth of $1.27 trillion. Their poorer cousins, the top one percent, control 40% of our wealth if housing alone is excluded.
On the other hand, the majority is being squeezed more and more and purse strings tightened. Simply put, the average consumer has been losing ground in the last thirty years.
Extensions of credit to family households concealed this decline and kept the economy going until debt burdens finally led to the current wave of defaults, especially in the housing market where speculators drove prices to unprecedented levels.
Too much money in the hands of too few fundamentally led to the crisis, according to Jack Rasmus, a former elected union official turned college professor and writer, whose latest book, Epic Recession, Prelude to Global Depression, has just been released by Pluto Press.
“A massive amount of liquidity in the hands” of “wealthy individuals, their various investing institutions like hedge funds, private equity firms, private banks” and corporations have created over the last three decades a “global money parade…that sloshes around the global economy in pursuit of the greatest short-term returns, which in recent years have become increasingly speculative in nature.”
Rasmus cites 2006 statistics that reveal both the relative value of global financial assets and their infinite variety such as cash, stocks, bonds, options, certificates of deposit, commercial paper, money funds, foreign currency, precious metals, commodity futures, derivatives, redeemable insurance contracts, accounting receivables and more.
The endless, toxic brew of financial cocktails outstripped the world’s total production of commodities by a factor of three. In the United States, it was worse, the enormously lucrative financial sector accounted for four times the Gross Domestic Product (GDP), a measure of all the goods and services produced in this country.
Numerous investment schemes were concocted to attract this excess glut of global capital that saw more profit in paper transactions than in production of real goods and services. As demand for speculative ventures multiplied, so did the stock market.
The Dow Jones jumped an incredible 8,000 points from 1994 – 2000, the largest leap in its history. All seemed to be going good, too good as it turned out. Little of real, hard physical value was being produced as the global economy was awash with trillions of dollars in the pockets of the wealthiest among us, all swimming toward the next big speculative venture.
Cracks began to appear during the Asian currency crisis and the Dot.com bust of the last decade, creating what billionaire financier George Soros described as a “longer-term super bubble.” But, thinking they held all the cards, the Federal Reserve Bank threw more chips into the pot by dramatically lowering interest rates.
The Fed often worked this way by making sure the money faucet flowed anytime Wall Street got a little thirsty.
With more money on the table, banks in the first years of this decade actually aggressively pursued home buyers just to keep the casino doors open. More home buyers meant higher home prices meaning even more eager purchasers of mortgage-bundled investments. With new blood in the water, the feeding frenzy by speculators continued.
Thus, warning tremors were ignored as profits continued to flow. Few recognized or wanted to admit that the economy was built on shallow landfill unprepared for the next “Big One” to hit.
However, when consumers could no longer afford the skyrocketing price of a home, the hot item topping the menu of speculators the last few years, the housing market finally collapsed. The resulting sag in home purchases in 2006 was compounded by the growing number of defaults, thus triggering an enormous free fall of the fragile financial structures that depended so heavily on the fantasy that home prices would steadily and endlessly increase.
How did this happen?
New financial packages were developed in the U.S. housing sector that profited enormously as each mortgage of the original physical asset, a home in this example, was bundled together with assorted other stock portfolios, hedge funds and securities that was passed along a chain of sellers and buyers. Each investor profited from every subsequent exchange even as the paper trail extended far beyond the initial real, material asset of the home.
Speculators of home mortgages both produced and greatly benefited from the surge in housing prices. In fact, higher home prices were essential to maintaining the profitable sale and resale of these bundled mortgage investments to new investors climbing on board.
As is the nature of Wall Street thrill seekers, no one believed the ride would end.
In fact, to keep the wheel of fortune turning, lenders began desperately and aggressively offering no interest home loans to credit-deficient working people who subsequently defaulted when the Federal Reserve Bank began raising their credit line from a floor of one percent to over six percent after 2003.
Hundreds of thousands of defaulting families, often portrayed by Wall Street apologists as causing the deep recession, are really the victims and pawns of these shady pyramid schemes.
The whole scheme depended on housing prices rising and this worked for awhile as speculative demand for housing derivatives increased. But, at some point, the material asset of a home, for example, must actually correspond to a more real set of values.
Rasmus makes the point that supply and demand restraints do not equally apply to speculative ventures. In fact, it is demand that is the driving force there and as demand grew for the sale and resale multiple times of home mortgages to investment firms, for example, so did the price of each subsequent transaction escalate. Profits and fees were added along each step, thus, also driving higher the price of homes.
The price of the real, physical entity of a home, unlike its various speculative paper derivative counterparts, however, is affected by market supply and demand as Rasmus explains. So, when home prices outdistanced the ability of cash-strapped and debt-ridden consumers, a cascade of defaults resulted, adding to the housing glut and leading to dramatic declines in home prices.
The boom finally went bust. But Buffet and the other billionaires are still smiling. They either profited enormously in those years or were bailed out by the Bush and Obama administrations that subsidized several trillion dollars of losses of the 19 largest banks and investment firms in the United States.
But not one dollar was extended by the government to homeowners directly. In effect, nothing has been done to solve the underlying problem which is that working families have become chronic under consumers. The problem is acerbated since being deprived of credit which was the one life line to compensate for lower wages and higher health care costs.
The author does not, therefore, exclude the economy descending even further.
The current situation is nothing more than a holding pattern, a stalemate that only temporarily avoids descent into depression. The fragile banking system was beefed up but little has been done to rebuild the deteriorating condition of worker consumers in this country and no recovery is possible without this being addressed.
Depression or recovery?
Not surprisingly, the former labor organizer offers a political theme in his final chapter recommending solutions. In it, he expresses more confidence in a rejuvenated union movement that champions working class economic and social reforms than he does in the politicians in Washington who have amply demonstrated their class bias favoring banks and investors.
The book contains descriptions of several other epic recessions in our past such as in 1907 – 1914 and in1929-1931 where little or no government spending on jobs led to what the author calls severe “consumption fragility,” setting the stage for long-term stagnation on the road towards a full blown depression.
These economic catastrophes were only averted by massive government spending leading up to WW1 and WW11.
For Rasmus, turning the economy around today means learning from these experiences by, first, closing the widening gap in wealth between the top and the bottom and by, secondly, investing that surplus directly into productive sectors of the economy.
It starts with substantial tax reform of capital income.
For example, the huge state deficits of California and New York could be wiped out today by applying a one percent tax on the top one percent of their wealthiest residents. Many European countries do this.
With a correct tax program, there would be no national, state or municipal deficits. In fact, there would be a tax surplus resulting from more working people employed and earning a decent living.
It would shift the side-tracked political discussion in this country away from using existing deficits, mostly induced by war spending and bank bailouts, as an excuse to halt government spending on jobs and social programs.
“These are key political points,” Rasmus told me, “that must be raised and discussed more, otherwise folks will think the only alternative is to cut the deficit which means immensely more pain for the working class and, inevitably, a descent into depression”
His other solutions include nationalization of key banking transactions to provide no-interest home loans, the same benefit provided to bailed-out banks and investment firms.
The exception to George Bernard Shaw’s observation
Epic Recession ably exposes the fraudulent nature of the economic boom of the last decade. The book explains how it happened, how previous recessions and depressions arose and abated, how dramatic structural changes of the economy must go well beyond reinstituting needed banking regulations and how the government should acquire funds through a fairer tax system and then spend these trillions of dollars for social programs and jobs to upright a thoroughly imbalanced economy tilted toward the super rich.
The reader is conveniently provided three distinct book sections which can each be read independently: a discussion of broad economic theory, a description of U.S. economic history and an analysis of the causes and solutions to the current epic recession. The introduction gives an excellent overview of all three of these chapters.
Thus, the author is the exception to George Bernard Shaw’s observation that “if all economists were laid end to end, they would not reach a conclusion.” On the contrary, Professor Rasmus has plenty of opinions, all fact-based, and plenty of conclusions, all well-documented.
But the author does face the obstacle wittily noted by another famous authority, the late liberal American economist John Kenneth Galbraith who once wrote that “economics is a subject…resonant with boredom. On few topics is an American audience so practiced in turning off its ears and minds. And none can say the response is ill advised.”
Students, workers, social activists, and those who simply want to examine more closely the collapsing world economy dramatically affecting us all, would be well advised to plunge ahead. To be sure, this is not a happy face book that can be read leisurely with your iPod blasting away. This is a scholarly work on a serious subject that deserves to be studied thoughtfully. This does not mean it is too difficult to understand.
On the contrary, the book shatters the mystique of economics. Human decisions, not Adam Smith’s legendary “invisible hand,” have brought us to the brink of disaster. If you want to understand better the world around us, better understand the current turmoil engulfing us and better understand and even anticipate future events that lie ahead for us, Epic Recession belongs on your bookshelf.