Friday, September 10, 2010


The decline of the American Empire is occurring as we speak. It is also increasingly anchored to a nation that embraces the financial smoke and mirrors peddled by Wall Street.

But Wall Street isn't really interested in helping the economy - or our nation - manufacture exportable goods like wind, solar, and other Green technologies of the future. Instead, they're focused on "investing" in the production of increasingly useless (and damaging) derivative markets, accounting discounts (see the S&L mess), structured investment vehicles (capital arbitrage), and other "innovative" market instruments that produce quick payouts and bonuses for Wall Street executives.

As a result, the real economy is being held hostage to the quick financial gains that Wall Street can make in what Peter Drucker called the symbolic economy. The problem here is that the practices embraced in the symbolic economy are little more than accounting gimmicks. They not only create a casino mentality, which contributes to market bubbles, but allows Wall Street executives to use creative accounting to extract wealth, as opposed to building it.

Think about it this way, between 2002 and 2008 about $1.4 trillion in subprime mortgages were issued. However, Wall Street then took these simple mortgage contracts, bundled them up into securities, sold them, and then made huge bets on them. In the process they created about $14 trillion in "securitized" bets (e.g. CDOs/CDSs) which dwarfed the actual value of mortgage contracts. In oversimplified terms, it would be the same as if you were able to bet $1.4 million based on the value of your $140,000 house ... even though you hadn't paid off the mortgage!

The absurdity of these bundled market bets was made clear when housing prices began to collapse, like a house of cards ...

If we channel the financial ghost of Joseph Schumpeter it's easier to say that we're no longer living in a world where Wall Street is interested in helping to build monopolies. They just want to play it.

As always, the proof is in the pudding.

Right before the market collapsed in 2008 the financial sector (investment banks, commercial banks, etc.) accounted for 40 percent of corporate profits. After the market collapse (2009) it accounted for about 36%. Much of this figure is due to the fact that the services sector (which includes insurance, finance, etc.) has grown, and now represents more than 50% of our nation's economy, which is up from 30.2% in 1960.

All of this means that the primary characteristics of the market have changed. We no longer produce real durable goods & services that other countries seek. Instead we are the kings of producing empty symbolic goods & "services" that can't compete with the technologies of the future currently being developed in places like China, Brazil, and Asia. This has occurred because our nation's market players have increasingly found it easier to make derivative bets, play with the tax code, game regulatory agencies, cut examiner budgets, and secure favorable legislation from congress so that their market instruments - rather than real investments in durable goods - can prosper.

The rest of America, if we are to read into Wall Street's actions, can eat crack.

Among the many problems that have emerged from our borrow and spend, tax cut, and deregulation orgy over the past thirty years include:

(1) Massive debt loads for our country ($13 trillion and counting).

(2) The GOP's continued embrace of jihad-like tax cuts for the rich policies (necessary for placing financial bets, and to win elections) and deregulation (necessary for looting our nation's wealth).

(3) The financialization of our economy (finding out how to produce CDO-squared derivatives isn't an espionage task other nations will send their spies out to pursue).

(4) A casino like mentality that focuses on extracting wealth for a few rather than creating wealth for the nation.

How do we fix this mess? Among the many solutions I like, which I've commented on before, include:

(1) Reregulating our financial sector (Europe is actually leading the way here).

(2) Creating a consumer protection agency with teeth (let's start by naming Elizabeth Warren to head the agency).

(3) Tax claw backs (to get back some of the ill-gotten gains).

(4) General tax increases on the top 2% of the nation (who actually did little for their increased wealth over the previous 30 years, beyond securing favorable legislation), and

(5) Enacting the Tobin Tax (a small tax on fast-paced, high-frequency trading, which feed a Casino mentality).  

There's more, but I'll leave it at that for now.

Zach Carter has an interesting article that discusses some of the background information necessary for understanding what needs to be done, and how we can scale back our bloated financial sector. It's real simple stuff. Check it out.

- Mark

No comments: