WALL STREET'S DOING IT AGAIN (PART II): Our Daisy Chain of Debt

Last week I wrote in a post that Wall Street was "doing it again." Specifically, in the post I discussed how broker-dealers in the 1960s had "borrowed" assets from client accounts and used them as collateral to secure loans from banks (i.e. repo borrowing). They then used the money to make investments elsewhere, which they (or the firm) pocketed when the gambles paid off. Problems developed, however, because numerous broker-dealer deals failed, which led to over $100 million in losses for their clients.

As you can imagine, investors were furious. Congress acted and we ended up with new regulations through Rule 15c 3-3. To be sure, broker-dealers in the United States still retained the authority to borrow against client accounts. But they would not be able to operate as loosely as they did in the late 1960s (securities accounts were segregated, new net capital rules were implemented, reserve requirements were imposed, etc.). This is precisely why this article by Money Morning's Keith Fitz-Gerald is an eye opener.

In "How Banks Are Using Your Money to Create the Next Crash" Fitz-Gerald makes it clear that market players are not only using client accounts to borrow money and make trades elsewhere, but they're now borrowing and gambling at record levels.

How is this happening, you ask? Check it out.

Let's say you have a portfolio valued at $5,000. Most of what you have is invested in stocks, securities and other market instruments. Suddenly, you find yourself in need of cash (for whatever reason) and dip into your investment fund. You borrow $2,000 against your $5,000 portfolio. Legally you have to pay the $2,000 back or suffer serious early withdrawal tax penalties. But you're fine with this because you're actually paying yourself back.

Good so far? Great. This is where it starts to get good.

According to SEC Rule 15c3-3, the broker-dealers who run your portfolio can take what you owe to yourself - in this case $2,000 - and use that amount as a source of credit for their own use. Loosely speaking, your broker-dealer can use your promise to repay yourself as if it were a promise to pay the firm. The idea is that since you're going to return the $2,000 to your fund, you're actually paying your broker-dealer because they're the ones who manage the account.

It makes perfect sense, doesn't it? I mean, since you owe your account money, it's actually a credit for the broker-dealers who manage your funds, right?

But wait. It gets better ... for the broker-dealers that is.

According to the rules broker-dealers can add 40% of what you owe to "their" credit accounts. So, for example, if you borrow $2,000 from your account your $2,000 debt magically turns into a $2,800 credit (or borrowing limit) for the broker-dealers. Once your broker-dealer borrows $2,800 and then deposits it in a bank the $2,800 (less reserve requirements) can then be invested or lent out elsewhere. This money can then be deposited, and then used again (again, less reserve requirements), then deposited and lent again, then ... well, you get the point.

This daisy chain of debt is one of the primary reasons that the size and volume traded in our financial markets has exploded (computers, deregulation, etc. have also contributed to its growth).

In effect, your debt contract enables broker-dealers to borrow and gamble in other areas that they might never had done, were it not for your account. And while it's been going on since the 1960s, it really exploded with computers, deregulation, and the creation of new security products (repo borrowing surged past $1 trillion before the 2008 market collapse).

The explosion in financial trading has been phenomenal. Consider the following.

While our national economy produced approximately $14 trillion in goods and services in 2011, the total value (i.e. "notional value") that our financial market players have gambled on various market instruments, or now claim some kind of control over, has grown to well over $300 trillion (commercial banks contribute about $120 trillion to this amount).

To put this in perspective, this is akin to your debt-laden neighbor making $60,000 a year and your bank allowing him borrow $1.2 million to invest gamble as they want.Try asking your bank if they'll let you borrow 20 times the value of your assets & income.

But wait. It gets even better. On a global level, if we throw in what market players in the G-10 nations are doing, the total value (i.e. notional value) that our market players now control or claim some kind of authority over now hovers around $600 trillion, or 40 times what America produces in a year. Nice.

At the end of the day, this financial daisy chain is built on your hard work. It derives it's entire value from your financial accounts (and your debt). But here's the kicker. Whatever paper trail of wealth that's created won't be shared with you (have you ever seen a note in your monthly portfolio statement that reads "Here's an extra $20,000, which represents a small part that I earned from using your account to make bets elsewhere"? Neither have I).

According to Larry Fitz-Gerald, not only is this wealth extracting daisy chain legal, but "it's common practice specified in the fine print of most brokerage agreements." And it's called rehypothecation.

I think I'll leave it that for now.

- Mark

ADDENDUM: All of this is only the beginning. The legal use of your account (i.e. rehypothecation) has created a murky world where activities derived from your account (i.e. pledged collateral rights tied to rehypothecated instruments) can be used by several entities at once (p. 9). This is one of the reasons that the size of our shadow banking system (which is largely unregulated) now reaches into the multiples of trillions (p. 9), while the size of our real economy pales in comparison to our symbolic economy by a ratio of at least 20: 1. 

WEALTH EXTRACTION 101

Remember this? (full view here; thanks Seven)

This chart explains who owns the title to one home in America. It was put together by a securities analyst who wanted to know who held the title to his home. It took him one year to figure this out. Here's the incredible part. It's the day job of this analyst to figure this stuff out on a daily basis.

Yeah, I know. Property rights in America shouldn't be this difficult. What a mess.

Anyways, I wrote about this and the legal maze that makes our financial and real estate markets such a mess earlier (here and here). Specifically I wrote that the very notion of property rights in America may be in trouble because of how Wall Street wanted access to income streams (to create securities), but didn't want to actually produce anything for the money. So they found a way to dump the actual title (plus the administrative and legal responsibility) of a home on to an obscure mega corporate entity called Mortgage Electronic Registration Systems (MERs). Then - in a demonstration of wealth extraction at its finest - they siphoned off the house payments into another legal maze (of securities) that benefited a few Wall Street market players.

And just like that, a small group of market players were able to make claims on millions of mortgage payments (through various "security" instruments) without having any responsibility for filing, registering, and tracking who owned the note on the house. (If you're looking for a metaphor it's kind of like handing the car keys, your wallet, and a keg of beer to your unemployed cousin and telling him to have fun.)

This is where it gets real good.

Rather than deal with homeowners after the mortgage bubble collapsed - and after their mortgage payment-security scheme went bust - Wall Street and other big market players said: "We can't negotiate with homeowners because we don't have the title to the home (MERs does). And besides, the loans have already been sold several times over ... oops."

Then, while threatening that system collapse was imminent if they didn't get bailed out, Wall Street and America's biggest financial players got the federal government to provide them with trillions in taxpayer backed guarantees. Why should big banks and Wall Street have to negotiate with homeowners (and learn from market justice) when Uncle Sam can foot the bill for their greed and arrogance?

Trillions of dollars in bailout money are now being used to purify and prop up an entire industry, while filling financial holes created when the income stream (i.e. mortgage payments) behind Wall Street's (pyramid) security schemes dried up.

Again, wealth extraction at its finest (if you're wondering why Wall Street isn't in jail, me too).

Anyways, I'm writing about all of this (again) because of how this Harper's Magazine article on MERs (hat tip to Barry Ritholtz) explains how Wall Street can make claims on money without actually producing anything of value. It also helps us all understand how our nation's biggest market players have undermined our nation's market integrity, while making a mockery of property rights in America.

If you care about the Constitution (hello, Tea Party) and the future of our nation this is one of the areas where you should be directing your attention.

- Mark

INTEGRITY OF THE MARKET IN TROUBLE

Those of you who have read my book, or who read this blog regularly, will understand the following two pieces instantly ...

In my book I discuss the difference between wealth creation and wealth extraction. This article from NY Times' columnist Paul Krugman (hat tip to Brian) helps explain the mechanics behind wealth extraction ...

This SF Chronicle article from Robert Reich - which discusses Wall Street's dependence on bailouts, and their subsequent government escorted record profits - helps explain why Wall Street is its own worst enemy.

Both pieces help us understand why the moral justification of capitalism is in trouble. In a few words, Wall Street is destroying what most of us understand to be the integrity of the market.

- Mark

KRUGMAN: "PANIC OF THE PUTOCRATS"

___________________________________________

In addition to creating the link, I'm going to post half of Paul Krugman's NY Times' op-ed, "Panic of the Plutocrats." Follow the links to read the entire article. It's excellent.
___________________________________________


Op-Ed Columnist
Panic of the Plutocrats
By PAUL KRUGMAN
Published: October 9, 2011

It remains to be seen whether the Occupy Wall Street protests will change America’s direction. Yet the protests have already elicited a remarkably hysterical reaction from Wall Street, the super-rich in general, and politicians and pundits who reliably serve the interests of the wealthiest hundredth of a percent.

And this reaction tells you something important — namely, that the extremists threatening American values are what F.D.R. called “economic royalists,” not the people camping in Zuccotti Park.

Consider first how Republican politicians have portrayed the modest-sized if growing demonstrations, which have involved some confrontations with the police — confrontations that seem to have involved a lot of police overreaction — but nothing one could call a riot. And there has in fact been nothing so far to match the behavior of Tea Party crowds in the summer of 2009.

Nonetheless, Eric Cantor, the House majority leader, has denounced “mobs” and “the pitting of Americans against Americans.” The G.O.P. presidential candidates have weighed in, with Mitt Romney accusing the protesters of waging “class warfare,” while Herman Cain calls them “anti-American.” My favorite, however, is Senator Rand Paul, who for some reason worries that the protesters will start seizing iPads, because they believe rich people don’t deserve to have them.

Michael Bloomberg, New York’s mayor and a financial-industry titan in his own right, was a bit more moderate, but still accused the protesters of trying to “take the jobs away from people working in this city,” a statement that bears no resemblance to the movement’s actual goals.

And if you were listening to talking heads on CNBC, you learned that the protesters “let their freak flags fly,” and are “aligned with Lenin.”

The way to understand all of this is to realize that it’s part of a broader syndrome, in which wealthy Americans who benefit hugely from a system rigged in their favor react with hysteria to anyone who points out just how rigged the system is.

Last year, you may recall, a number of financial-industry barons went wild over very mild criticism from President Obama. They denounced Mr. Obama as being almost a socialist for endorsing the so-called Volcker rule, which would simply prohibit banks backed by federal guarantees from engaging in risky speculation. And as for their reaction to proposals to close a loophole that lets some of them pay remarkably low taxes — well, Stephen Schwarzman, chairman of the Blackstone Group, compared it to Hitler’s invasion of Poland ....


Read the rest here.
___________________________________________
 
- Mark

WALL STREET OPERATING AS A CRIMINAL ENTERPRISE?

If you want to know what's helping to drive the protests on Wall Street check this out ...

I've been saying that we should use mob-driven RICO statutes to go after the banksters for some time now. The key is prosecuting our biggest banks as criminal enterprises. So, have our nation's biggest banks become criminal enterprises? This July article from Money Morning's Shah Gilani - "The Bank of America Settlement: The Latest Travesty in the U.S. Banking System" - says the answer is "yes."

Those of you who follow this blog know why I agree. So, I'll leave it at that for now.

On another note, this article on pensions explains why we need to keep public sector defined benefits programs with the public sector, instead of shifting public sector retirement monies to Wall Street/private sector managers.

In a few words, the private sectors fee and bonus stuffed overhead costs are prohibitive, with guaranteed percentages regardless of performance. In many ways, it's the essence of wealth extraction over wealth creation.

Neither article is long or overly complex, so I'm pretty sure you'll enjoy both.

- Mark

SUPERCHARGING WALL STREET, AND AMERICA'S EVOLVING SYMBOLIC ECONOMY

__________________________________________________________

In my International Political Economy course today we spent a good deal of time talking about the interplay between economics and politics, and how both impact modern markets. Since some of it was a bit detailed, below is a brief outline of some of the topics we discussed in class. Those of you who are not in my class can read too  ;-)
__________________________________________________________

In International Political Economy class this Monday we briefly discussed what happened when Congress created the 401k (tax deferred incentives to invest), and then encouraged, or allowed, other novel financial instruments to arrive on our economic stage. In the process Congress supercharged Wall Street's numbers, but what we really saw was the evolution and consolidation of what Peter Drucker called the "symbolic" economy, and what Kevin Phillips referred to as the beginning of the "financialization" of the American economy.

What did this mean for America? In a few words the American economy became increasingly dominated by trade in money, interest rates, futures contracts, and other "derivative" instruments. Trade in durable or manufactured goods has taken a back seat to these financial products. In fact, the American economy has been trading in these "symbolic" financial instruments to such a degree that they now represent at least 20 times (and perhaps 40 times) what we will produce and trade in the "real" economy this year (about $15 trillion).

In plain speak - and as economist Joseph Schumpeter might have put it - we are now living in a world where America's economic mandarins are playing monopoly rather than building them. This is the biggest difference between the Robber Barons of the past and our Robber Barons of today.

The Carnegies, Morgans and Rockefellers of the 19th century built steel mills, railroads, and other real industries which created real wealth. If they went bust at least they left railroads, steel mills, and other industries of substance. Not so with today's financial wizards. The Robber Barons of the 21st century are financial zombies bent on extracting rather than creating wealth. It's really that simple.

We can see the impact of America's economic transformation because of the increased emphasis on the financial sector, and because how more and more of Americans are seeing their wages squeezed (see graph below). Unfortunately, this has forced many Americans out of the middle class.

At the same time Americans are watching their incomes collapse Wall Street has focused on safeguarding their empires of paper wealth, and finding new ways to pump up the market. This is one of the reasons we have seen a plethora of financial instruments created and traded. Not surprisingly, total volume traded on the NYSE has exploded since 1982 ...

As should be expected, with every fee-laden trade, and with every new expanded portfolio managed, Wall Street's financial mandarins have gotten increasingly wealthier. This explains, in part, the growing wealth gaps in America.

But volume isn't everything. There's also this. Every time Wall Street's financial wizards created new ways to trade and then collapse the economy, Congress and the Federal Reserve have stepped in with an assortment of bailouts, money dumps, and favorable legislation to save their bacon.

WHAT WE'RE GOING TO DO IN CLASS THIS QUARTER (in part)
While many Americans don't understand the details of any of this, one thing is clear: Our economy is increasingly built around, and dominated by, fuzzy financial instruments that take many shapes. The financialization of America's economy is part of what we'll be looking at in class this quarter. We'll be doing this at a global level too.

As an example of how the financialization of the economy works in the United States we can look at home mortgage loans and other debt contracts (student loan, credit card debt, etc.). Specifically, when we look at what's happened to mortgage contracts we find that they are no longer single documents holding all the information you need to know about a loan. Instead, home mortgages (and other debt contracts) are sold, bundled up with other mortgage contracts, and then resold as a collateralized debt obligation (CDO) security.

Today most mortgage contracts that are bundled into securities and sold can only be understood if you can decipher this ...

While these mortgage backed CDOs make money for market players the thing to understand is (1) how these CDOs created the environment for deregulation and shoddy lending standards, among others, and (2) how these CDOs pushed the financial industry, and our shadow banking system, to ask for more (shady) debt contracts.

These contracts lie at the heart of what brought the economy down in 2008.

The fact that we did little to fix the problems that caused the meltdown after 2008 help us understand how much power and influence the financial sector has in our economy, and why our next market collapse will happen. Also helping us understand how our new economy functions is that, while all of this has been going on, the vast majority of Main Street has seen their wages decline since 1980 while the financial sector has seen their compensation soar ...

Two key components of this new economy include the wonderful world of "derivative" markets and our extremely important "shadow banking" system (which GOP FCIC members pretended didn't exist in their 2010 report). If you can find the time, try and read the links.

These topics are among the many issues we're going to be looking at this fall. I'll have more to say about derivatives, our shadow banking system, and our symbolic economy as we move through the quarter.

- Mark

WALL STREET... "SCREW THE CAR FAX"

One of the reasons the market collapsed in 2008 is because market players either ignored or didn't have enough information about derivative market exposure. Then they ignored the casino economy this ill-informed derivative market helped create. This is important because when market players learn new things about co-signers, collateral, job status, price, or market valuations they might be more (or less) willing to consummate the deal.

Think about an esteemed uncle who promises to co-sign a house note for you, and then learning that he is going to declare bankruptcy. But his books still look good, so he's willing to hold off until you get the house. Is withholding this information a good idea, for anyone? Now imagine this market wide.

Not securing and sharing critical information proved devastating in 2008. Even though Wall Street and other market players were backed up by rosy market models (that few understood), the money people on Wall Street started to panic when they learned that big financial houses (like Lehman Bros.) didn't actually have the money to back up their over sized market bets.

Well, hold on to your hats. Because of Wall Street's muscle in Washington, it looks like much hasn't changed after all. Wall Street's lobbyists have fixed things so that we're poised to party like it's 2008. Cue to Prince ...

Seriously, International Finance Review is reporting that the trading centers ("trade repositories") that are supposed to document and house information crucial for derivative markets may not be collecting the information that they should. According to a recent report on Over The Counter (OTC) derivative data, the regulatory scope of derivative trade centers appears to exclude,

"... information contained in derivatives master agreements and credit support annexes, as well as data relating to collateral or payment transfers, or valuation data coming from external sources."

Translated this means that critical due diligence - like collateral and market valuation, among others - that could help assess risk, isn't always documented or presented. You know, kind of like before the market collapsed in 2008.

So, in spite of Dodd-Frank (as I pointed out here), Wall Street can enter into a derivative agreement and they don't necessarily have to reveal previous prices (how much the last customer paid) or demonstrate proper collateral. It's kind of like going car shopping and asking for the Car Fax and being told, "Our market doesn't really require this."

Why is this important? Because as of January 2010 the notional value of the OTC derivative market has apparently grown to about $300 trillion dollars in the U.S., and over $600 trillion between the G-10 countries. This is about 20-40 times the size of the American economy.

So, yeah, we're doing it all over again.

- Mark

ANATOMY OF OUR NEXT MARKET CRASH

Earlier this week I wrote that the market meltdown we're experiencing is not really a product of the credit downgrade, which was brought to us by the GOP's brinkmanship stupidity. Rather, what we're witnessing is a political system that has failed to deal adequately with what brought us the 2008 market collapse: reckless deregulation, poorly targeted tax cuts, a culture of debt, and unabated speculation and gambling on Wall Street.

If we had done something significant about any of these issues in 2009 the GOP-led clown show we saw last week would've been a side show. We would be slowly crawling out of the 2008 mess, and Bernie Madoff would have some Wall Street company while in jail. Instead, we're surviving on artificially low interest rates and the fumes of bailout money, while we continue to listen to those who make calls for more deregulation and reckless tax cuts.

To prove the stupidity has marbled it's way into the hearts of Washington, an entire segment of beltway insiders believe that deregulation, reckless tax cuts, and speculation are not a problem. They even issued a report in December saying as much (the report was "a joke", which I discussed here).

One of the byproducts of our national failure to see the truth is that the banks and Wall Street's biggest financial institutions have been able to (knowingly) violate basic investor protection rules, defraud customers, cook the books and not admit wrongdoing (while avoiding trial), as long they pay a fine. And they pay because the fine is often less than what they collected in fees and profits.

Throw in the fact that no one can understand the "legal" but incomprehensible maze-like paper trail that contributed to our current mess, and what we have staring us in the face is what the author of The Best Way to Rob a Bank is to Own One - William K. Black - called control fraud. And it's slowly destroying the moral justification of capitalism, which informs every American that if you work hard you can get ahead.

As evidence, we see that 30 years of being told that deregulation and tax cuts for the rich would lead to prosperity for all was really a cruel joke. We're now living in a nation where wage increases, which traditionally accompanied increases in labor productivity, are siphoned off into record executive salaries and bonuses.

Worse, instead of being rewarded with more jobs as the "tax-cuts-lead-to-more-jobs" drones like to argue, American multinationals actually eliminated 2.9 million jobs here, while adding 2.4 million jobs abroad over the past decade. Today, after 30 years of tax cuts, unemployment hovers around 9.1 percent (while our national debt has soared to $14.3 trillion).

Throw in the fact that the banks don't trust one another (and haven't for a while), and what you have is an economy surviving on the fumes of a trillion dollar money dump that was largely extorted from the American taxpayer. The fact that the money dump benefited few sectors of the economy beyond Wall Street and America's biggest banks makes it one of the greatest transfers of wealth in human history. 

Simply put, we're in trouble because no one seems capable or willing to take on, as Teddy Roosevelt put it, the malefactors of great wealth (something even Standard & Poor's missed).

Instead, the republicans are guided by a scorched earth policy mentality that says "If we can't govern, neither will you," while the democrats are led by a president (who I voted for and still support) who can't seem to channel his inner FDR - or even his inner Teddy Roosevelt - for fear of antagonizing either Wall Street or the republicans.

This, in a nutshell, explains the financial troubles we're experiencing today. And it's why, unless we see some significant changes from the GOP or the president, we're going to have an even bigger market crash than we saw in 2008.

Count on it.

- Mark

DYLAN RATIGAN EXPLAINS (in part) WHAT'S WRONG WITH AMERICA

MSNBC's Dylan Ratigan goes off on his panel - and gets pretty emotional - but nails it with what's wrong with politics in America in this clip (the fireworks start at 4:20). He blames both parties for wanting to kick the can down the road, all the while watching as the banks, Wall Street, and America's economic elite extract wealth from the American taxpayer.

I write about wealth extraction over wealth creation to help explain the myth of the free market in my book.

Kudos to my friend Seven for spotting and posting this clip on his FB site.

- Mark

HERE'S HOW WE SUBSIDIZE THE RICH ...

Be sure to use this with your conservative "get-government-off-my-back" friends ...

In class I've been led into discussions on tax exemptions, tax deductions and other financial gifts for the wealthy, which are all made possible because of favorable legislation and taxpayer funded subsidies. In fact, there's more than $1.3 trillion in exemptions and deductions that you and I pay for, which primarily benefit America's wealthiest class.

No, that's not a typo. $1.3 trillion is equivalent to our national deficit this year. And this figure doesn't include our most recent trillion dollar bailout.

Worse, much of what we transfer to America's wealthiest class has little to do with creating jobs, and much more to do with extracting wealth and getting you and me to subsidize "the market." Here's a small clip that explains how it happens (incredible, only 9,805 people have watched since it came out 3 years ago).



You can get David Cay Johnston's book, Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill), here.

- Mark

THIS IS WHY WE'RE BROKE ...

If you want to understand the genesis of our current budget and debt mess let's start with this simple fact: The richest Americans have been paying far less in taxes than they did in the past. At the same time they're getting far more than they should in the form of bailouts, subsidies, and other favorable legislation from Washington.

Worse, America's richest class is getting support for their "Get-Out-of-Taxes-Free" card from a deluded middle class, who are egged on by an equally delusional group of Tea Baggers, who have bought into the bankrupt idea that if the rich pay less the country is better off.

While I've been saying this for a while now, the Guardian's Richard D. Wolff points out that the richest Americans have dramatically lowered their income tax burden since 1945, and really kicked it down when Ronald Reagan became president. In the process America's quality of life and it's ladders of upward mobility have been tightened and cut.

__________________________________________________

Wolff's article points out that when "the Cadillac Eldorado made its debut in the 1950s, wealthy Americans were paying a top rate of tax of 90%; today, the top rate of tax is 35%."
__________________________________________________

In fact, the marginal tax rate (what's on the books) on the highest wage earners dropped from a high of 90% in 1945 to about 70% under JFK, and fell dramatically to around 30% when Ronald Reagan was ready to leave office. Check it out ...

Because of this development the amount of taxes actually paid (the "effective" tax rate) by America's individual millionaires and corporate giants has dropped precipitously ...

... while the share of taxes paid by middle class America has soared. In sum, we have seen a scissors effect when it comes to burden sharing and tax payments.


The False Justification Behind Tax Cuts for the Rich
As I've been pointing out for some time now, the rich justify cutting their taxes by claiming that they will invest the money they save from not paying more taxes. This, in turn, will create more jobs. Their "the-wealth-will-trickle-down" argument has been debunked over and over again (Reagan was famously called out on it by the first President Bush, who referred to his policy proposals as "voodoo economics" during the 1980 primaries). Yet they persist in perpetuating the "cut taxes, more revenue, more jobs" myth.

What's actually happened after 30 years of trickle down economics is entirely different. Check it out.

* NATIONAL DEBT EXPLODES / MORE BORROWING: Over the past 30 years the wealthiest Americans have seen their share of taxes drop dramatically while America's national debt has climbed from about $975 Billion in 1980 to $14 Trillion today. Yet, the Republican Party and many (clueless) middle class Americans want to continue cutting taxes on corporations and America's richest class - as if it's patriotic to continue borrowing from the Chinese so we can pay for tax cut refunds to gazillionaires who don't need it. Simply mind boggling.

* SOVEREIGNTY UNDERMINED: As Wolff points out, the richest Americans take the money they save from taxes and invest big parts of it in China, India, and elsewhere. This produces more jobs over seas, but fewer jobs here. Worse, since we don't build things here any more we have to import more goods from abroad. Our balance of trade suffers, which means we send more dollars out - which the Chinese and others conveniently lend back to us. Nice.
 
* INCENTIVES / MARKETS DISTORTED: According to Wolff the richest Americans take the money they don't pay in taxes and invest gamble it in hedge funds and with stockbrokers who aren't necessarily concerned about the public good. Hedge funds and brokers use part of the money rich people save from taxes to speculate in the US stock markets, which benefits them in the immediate term because they own most of America's stock (look for the stock dump later). Worse, according to Wolff, in our current market environment brokers are often speculating in oil and food, which drives up their prices and undermines economic recovery.

Apart from getting much richer over the last half-century, we are now in the middle of an epic market meltdown that has seen Wall Street experience both record bailouts and record profits (there's an Orson Welles "Newspeak" quote in there somewhere). The average American, however, has seen their quality of life and standard of living take a hit in the form of greater uncertainty and less wealth.

The Political Impact ... A Nation of Morons?
At the end of the day, as we have reduced taxes on the rich in America we have seen economic incentives distorted, government services cut, and worsening inequality (of income and opportunity) in America over the the past 30 years.

Ironically, many Americans are missing the connections between 30 years of trickle down policies and these developments. As if tax cuts, tax write-offs, bailouts, subsidies, and other market distorting legislation that favors the rich has no impact on society. And it show in our politics. In many ways, we've become a nation of morons. And we have Fox News to prove it.

As Wolff points out, "a rather vicious cycle has been at work for years." But many Americans simply don't understand it. Because the rich have seen their taxes reduced they now have more money to influence politicians and politics. This influence "wins them further tax reductions, which gives them still more money to put to political use." Because government has lost revenue from 30 years of cutting taxes for the rich public services have become increasingly strained, while public debt has climbed.
 
But instead of calling for a return to the past, when the rich paid a greater share of their income - as Adam Smith argued they should - the rich constantly press politicians to cut public services and government jobs (and their taxes). Tea Baggers and other clueless middle class Americans, like lemmings jumping off a cliff, simply follow ... all the while mumbling about greedy public servants.
 

 
My friends, we're broke, and we're broke for a reason. We're not going to solve our financial problems by going after the chump change that public servants make. There are other options. But first we have to reverse 30 years of trickle down economics, which means we have to stop giving away the tax farm to the rich.
 
It's really that simple.
 
- Mark

WALL STREET GETS TRILLIONS ... MAIN STREET STAGNATES (yawn)

With corporate America registering record profits (again), have you ever wondered how much money Wall Street and America's moneyed elite have taken away over the past thirty-plus years? Well, wonder no more. Check this out ...

A little over ten months ago I wrote about the failures of economic policies that have promoted deregulation, tax breaks for the rich, and debt driven growth. What we've ended up with is a two-tiered casino economy that is debt ridden and dependent on favorable legislation to survive. In the financial sector the market players who thrive in this economy shun wealth creation built by hard work and discipline and depend on outlandish gambles regularly backed by bailouts to extract wealth from the economy.

Market bailouts, dating as far back as the 1970s, and favorable legislation have done much to prop up profits and shift wealth to Wall Street and America's financial aristocracy.

For example, and most recently, Wall Street's claims on wealth have exploded and depend on political favors. These favors range from allowing mortgage bankers to make a mockery of property rights (MERS), to the Obama administration's bungled attempts at creating a soft landing for the banks in the housing sector (HAMP), to unfunded trillion dollar guarantees and record bailouts (TARP) for Wall Street and their pampered clients.

Main Street's share of income and wealth, on the other hand, has either stagnated or collapsed as Wall Street's quiet coup of policy making in America has helped block reforms that might protect the American taxpayer.

The results have been predictable and, if we look at claims on the money supply, are easy to track. Specifically, if we look at the claims on money made by Wall Street (M-3) over the past 40 years versus the claims made by Main Street (M-1) we see something rather interesting ...

_________________________________________________________

Demands on U.S. Money Supply (select years)
_________________________________________________________
Year       M-1                M-2                 M-3 
_________________________________________________________
1972          $249 billion              $802 billion               $886 billion
1974          $274 billion              $902 billion               $1.070 trillion
1975          $287 billion              $1.017 trillion            $1.170 trillion
1984          $551 billion              $2.312 trillion            $2.991 trillion
1994          $1.150 trillion           $3.498 trillion           $4.370 trillion
2002          $1.219 trillion           $5.801 trillion           $8.568 trillion
2003          $1.306 trillion           $6.062 trillion           $8.872 trillion
2004          $1.376 trillion           $6.422 trillion            $9.433 trillion
2005          $1.375 trillion           $6.692 trillion           $10.154 trillion
2006          $1.367 trillion           $7.036 trillion           $10.299 trillion
2007          $1.367 trillion           $7.447 trillion                  N/A
2008          $1.600 trillion           $8.108 trillion           $13.835 trillion*

03-09         $1.577 trillion           $8.110 trillion                  N/A
04-9           $1.608 trillion           $8.364 trillion           $14.8 trillion*
12-09         $1.696 trillion           $8.542 trillion                  N/A
11-10         $1.832 trillion           $8.804 trillion                  N/A

_________________________________________________________
Note I: In very simple terms M-1 is the category we use to measure what you and I have in our pockets and in our checking accounts. Essentially M-1 represents what Main Street has available to spend. Without getting into the details, M-3 represents what Wall Street spends or claims from the U.S. money supply. For more on money and how we categorize it click here. 
Note II: Keeping track of M-3 (as a data category) was suspended as a "cost saving" measure by the Bush administration in 2006. I discuss this in Chapter 12 of my book, "From Deregulation to the Mother of all Bailouts" in The Myth of the Free Market.
Note III: * denotes "unofficial" M-3 tracking sites. Click on the links.
_________________________________________________________

Specifically, the claims on money by America's biggest financial players have soared (M-3), and went from a factor of roughly 3.5 times what Main Street claimed (M-1) in 1994 to 7.5 times in 2006 ... to 8.6 times in 2008 ... and a whopping 9.25 times by April of 2009.

So, what does all this mean?

First, it means that instead of running parallel to each other (at a historical ratio of 3.5 to 4 times greater) like this  =, the gaps between what Main Street has (M-1) and what Wall Street claims (M-3) now diverge like a sideways chevron like this < . This development is possible only because Washington has consistently bailed out Wall Street's ill-advised activities over the past 30 years.

Second, it helps us see that the bailouts, guarantees, and other market programs were never designed to save distressed homeowners, or the American taxpayer. Instead, favorable legislation and trillion dollar bailouts - which actually began in the 1970s and 1980s - have always been designed to keep money pumping into Wall Street.

Finally, it means that the earnings and income gains of Wall Street, and America's biggest market players, are not tied to the mythical "invisible hand" of the market. From favorable legislation, to tax breaks and tax write-offs, to deregulation, globalization, and the constant attacks on unions and minimum wages, the earnings and wealth gains that America's wealthiest classes have seen over the past 30 years have come off the collective backs of America's middle class.

Don't believe me? Check out personal debt loads in America. In fact, take a look at what has happened to personal obligations and government debt loads over the past 30 years.

At the end of the day, the reckless gambles made by the high rollers on Wall Street have been rewarded, under the guise of the saving the system, while Main Street is forced to absorb the costs of successive bailouts and mounting deficits. 

- Mark

WE HAVE A TAX DEAL, AND THE RICH WIN (again)

It looks like we have a tentative agreement on the tax bill. There was a lot of horse trading going on. This is what I see ...

If previous CBO projections are correct, extending unemployment benefits for those down on their luck will cost the U.S. taxpayer about $25 billion (give or take a few billion) over the next year.

Extending the Bush tax cuts for the rich, however, will cost the U.S. taxpayer at least $70 billion per year (if not more) over the next two years.

So, in order to get $25 billion into the pockets of millions of unemployed Americans over the next year we have to cough up at least $140 billion to America's richest class over the next two years.

Sounds fair to me.

Sigh ...

- Mark

P.S. To give you an idea how much extending the unfunded Bush tax cuts for the rich will cost think about this. If the tax cuts for the rich end up costing us $83 billion per year - which many think is the real number - we're looking at enough to pay for all veterans’ hospitals, doctors, and the rest of the Veteran’s Affairs health system, plus the United States Coast Guard, plus the Food and Drug Administration, plus the operation and maintenance of every single national park for the entire 10-year period ... with more than $100 billion left over.

WALL STREET'S TRILLION DOLLAR MONEY FLOOD

I've been saying this for some time now, but it bears repeating since most of America doesn't seem to be interested in much beyond Sarah Palin's latest Tweet and who's on American Idol. So let me make this perfectly clear, again: The $750 billion bailout that George W. Bush signed off on, and the subsequent $700 billion stimulus package that President Obama coughed up, were only the beginning.

Drops in the bucket, as it were.

What we should have been looking at - as I pointed out in my book, and have posted on my blog- are the trillions of dollars that were made available, loaned on the cheap, or effectively handed over to Wall Street's banks and other financial players.

Now, as a result of a forced transparency rider attached to the Wall Street reform bill (thank you Sen. Bernie Sanders) we have some numbers and names. Check out the trillions of dollars that were transferred to Wall Street by the Federal Reserve as our market collapsed ...

Goldman Sachs ... $600 billion
Bear Stearns ... $1 trillion
Citigroup ... $1.8 trillion
Merrill Lynch ... $1.5 trillion
Morgan Stanley ... $2 trillion

And this is just the easy stuff to pick out from the numbers. No wonder Wall Street's been making record profits. The U.S. taxpayer Federal Reserve essentially flooded Wall Street's accounts with cash so they could pay off each others bad bets.

This money, my friends, explains why Wall Street was able to pay 100 cents on the dollar for ill-conceived contracts, and then made good on billions in bonus payouts (to each other) for their incompetence.

 

At the same time, by looking at the figures on the Federal Reserve's new site we're able to confirm that the market collapse began a long time before September 2008. Worse, what we're able to see from the data is that the geniuses on Wall Street, and their errand boys in Washington, knew what was happening long before September 2008!

In fact, as I pointed out in December of 2007, Wall Street and the Federal Reserve began setting up the bailout "facilities" that would transfer trillions to Wall Street's biggest banks way back in 2007 (be sure to play with the graphs on the site to see what I mean).

But wait. It gets worse. Today the NY Times is confirming what I've been writing about for a while now.

Not only did Wall Street effectively extort money and guarantees from Washington but the Federal Reserve was either playing dumb or deliberately covering up for Wall Street during the bailout. Like Sargent Schultz in Hogan's Heroes, they knew or saw nothing as trillions were flying out the door.



Specifically, the NY Times is confirming that thousands of private firms and other market players who had their hand out received trillions in low interest loans AND other market guarantees from you and me the Federal Reserve during the bailout.

That's right. It wasn't just Wall Street's biggest banks that looted the treasury. Wall Street's biggest market players - a.k.a. America's super rich - also had their hand in our trillion dollar bailout cookie jar.

Try sticking this in your conservative friends' Christmas stocking, and then see if they want to hold a Tea Bag rally over it during our Christmas holidays. My guess is that they'll be more concerned over President Obama's birth certificate, or whine about more tax breaks for the super rich because they're the ones who "create jobs" in America.

Idiots.

- Mark

THIS IS WHY WEALTH GAPS CONTINUE TO GROW

In my previous post I warned about embracing the findings of debt commissions that are created with the idea of paying down our national debt, but do little to look at how we accumulated so much debt. As I pointed out, what we've ended up with are policy prescriptions that raise taxes on the middle-class, erase inflation from official statistics, and give America's super rich what amounts to a tax free ride.

And we've been doing this in spite of the fact that unemployment, budget deficits, and wealth gaps have climbed ... after we were told that tax policies that favored the rich would solve all our problems.

Well, get ready for another round of favorable legislation that will only benefit what is perhaps America's most pampered and undeserving class: the super rich who inherit even more money.

In this piece from Bloomberg.com it appears that many members of Congress - but especially the Republicans - want to extend the tax exemption that allows Paris Hilton, George W. Bush, and other super rich Americans to inherit family fortunes without paying any taxes on their financial gifts.

Try claiming that your gambling or lotto winnings should not be taxed and see how much sympathy that gets you.

While it's called the estate tax America's super wealthy have gotten their political Oompa Loompas - the Republican Party - to derisively refer to it as the death tax. It's usually a good political show because the press buys into the headline grabbing death tax story line. Then the Republicans whine, with effect, that people who have hundreds of millions of dollars dumped on their no lap (for no other reason than they came out of the right womb) should not have to pay anything on that wealth.

Incredibly many middle-class Americans buy into this nonsense, as if they have plenty of money to pick up the tax tab for the super rich.

We have record budget deficits, two ill-managed wars, unemployment hovering around 10%, plus unfunded trillions committed to Wall Street's bailout (which primarily benefit the super wealthy) and the Republicans think the George Bushes and Paris Hiltons of America - who did nothing to build their family fortunes - deserve yet another tax break?

Is it any wonder that the wealth gap in America continues to climb?

******************

For an excellent book on this topic read this from Bill Gates, Sr. (yeah, it's Bill's father) and Chuck Collins ...



If you don't have the time or money to get the book you can read this op-ed review of the book that I wrote for the Bakersfield Californian a few years back.

- Mark