Excerpt from Guilt By Association—How Democracy and Self-Deceit Took America to War (2008)
The issue of economics is not something I have understood as well as I should. I’ve got Greenspan’s book. —John McCain
Like many others, John McCain fails to grasp the harm done in the name of “economics.” Nor does he comprehend what other nations have endured at the hands of our “Chicago” model of economics. A lack of understanding by ordinary citizens is reasonable. That failure in a presidential candidate is frightening.
This chapter shows why—with the authority granted “economics” during the second half of the 20th century—Americans experienced record-breaking levels of inequality:
- From 2003 to 2005 the increase in combined income for the top 1% of Americans exceeded by 37% the total income of the poorest 20%.
- Incomes for the top 1% grew an average $465,700 (42.6%) each.
- Incomes for the bottom 20% grew an average $200 (1.3%).
- By 2005, Americans claiming more than $1 million in annual income (less than one quarter of 1% of U.S. taxpayers) claimed 47% of total annual income gains.
- By 2006 the top 1% of U.S. families pocketed the largest share of national income since 1929.
- Adjusted for inflation, from 2002 to 2006, incomes of the bottom 99% grew at less than 1% annually.
A review of the past quarter-century shows how the current brand of “economics” was guaranteed to make the rich richer. Professing his bona fides as a “true conservative,” John McCain proposes another Reagan presidency featuring “supply-side” economics. Consistent with game theory, the financial results—then, now and in the future—are perfectly predictable, as we shall see.
The Criminal State series chronicles the organized crime origins of that earlier supply-side presidency. A Californian branded as a maverick Republican, Reagan succeeded Arizona maverick Barry Goldwater as “the conscience of conservatism.” As the successor to Goldwater’s Senate seat, the maverick McCain promises a replay of Reagan’s maverick economics.
Deficit-Catalyzed Cash Flow
With Reagan’s election in 1980, belief in supply side economics displaced the belief in demand side economics that had guided policymaking since the 1930s. That shift was catalyzed a half-century later by advocacy featured in The Wall Street Journal, America’s premier financial news daily. In the 1930s, Washington turned to deficit spending to stimulate consumer spending (demand) in a Depression-era economy. Those borrowed funds enabled Roosevelt’s New Deal pay people for work on public works projects. It was not the New Deal, however, but warfare that brought an end to joblessness.
World War II drew on deficit financing to defeat Nazi-era fascism as the U.S. deployed its full faith and credit to pay people to wage war. In effect, Americans extended themselves credit to address that threat to American values. By war’s end, our credit was the world’s best and our bonds the most secure—because the U.S. was by then home to half the world’s post-war productive capacity.
Washington again turned to deficit spending in 1981. This time, however, the nation’s credit was deployed to stimulate not consumer spending (demand) but investment spending (supply). Stagflation was headline news along with the misery index measuring the combined agony of inflation and unemployment. When Jimmy Carter lost the presidency in 1980, federal debt totaled $900 billion. Reagan’s supply-side “economics” was enacted in 1981 at a projected fiscal cost of $872 billion over five years. Though portions were later pared back, he proved that a maverick “true conservative” could double the national debt with just one tax bill—provided he believed in the model.
Left unmentioned was how those supply-side deficits were certain to enrich the few while indebting the many. To grasp how requires a look at how tax policy affects finance, and how today’s globally dominant “closed system of finance” delivers perfectly predictable results—as any financially savvy game theorist could foresee.
Free Cash Flow
“Reaganomics” allowed more rapid tax write-offs for the cost of investments. When an office building can be written off in 15 years instead of 45, for example, more buildings are built. By allowing more write-offs, more cash became available to invest in the nation’s supply of office buildings. A former S&L official likened those real estate incentives to “dropping napalm on a forest fire.” To afford those supply-side incentives, the Reagan treasury pledged our full faith and credit to cover the shortfall in tax revenues.
More cash, of course, also meant more capacity for companies to repay debt. As that public subsidy passed through private hands, the leveraged buyout (LBO) began its steady rise as financiers applied those deficit-financed funds to purchase companies with borrowed money (“leverage”). Twenty-five years later, LBO firms in the U.S. raised $254 billion in a single year (2006). Private equity funds in Europe raised another $101 billion.
With companies able to afford more debt, a debt-free company came to signify inattention to how financial leverage could boost shareholder returns. Finance-ability became the new performance norm and “free cash flow” the new collateral for securing and repaying record-level debt. More cash made LBOs more feasible as the U.S. Treasury pledged our national credit capacity (our “full faith and credit”) to pay for Reagan’s maverick economics. In effect, we got the mortgage (the deficits) while they got the house. The deficits became ours while the wealth financed with our deficits became theirs—as the already wealthy grew rapidly more so, as did financial sophisticates (the people in between).
Reagan’s “maverick” supply-side era also saw the rise of Wall Street campaign contributors determined to see more public subsidies for private-sector finance. That demand was met with a deficit-financed surge in defense spending, a rewrite of rules governing the thrift industry, and tax cuts for those few who pocketed the bulk of this debt-financed wealth. Those changes also catalyzed the first nationwide financial fraud, the S&L crisis, in which Alan Greenspan played a key role. [See Chapter 3.]
Thus too the dramatic change in composition of the Forbes 400, as 100 of America’s richest now trace their wealth to financial services—up from 30 when the list was first compiled in 1982 at the outset of the supply-side era. With public sector deficits as the lubricant, private sector debt could run amok. With the availability of deficit-financed “free” cash flow, financial markets sent executives a clear message: either load up your company with debt or someone else will. As debt became the new imperative, financial leverage became addictive, as did government deficits.
The pace of LBOs quickened as it became apparent this free cash could be used not just to expand the supply of new investments, but also to fund buyouts of existing investments. In neither case was there any concern that the benefits were certain to flow largely to a few. So long as the firm was creditworthy, debt itself was indifferent whether it was used to finance new assets or transfers of old assets. Yet, as we shall see in the “closed system” analysis (below), the rich-get-richer result was foreseeable in either case.
That deficit-financed cash flow also helped afford the high yield interest rates paid on corporate bonds used to finance LBOs. Beverly Hills bond broker Michael Milken emerged as the “junk bond king” when, five years after supply-side economics took effect, his bond commissions for 1987 alone totaled $550 million.
Two decades later, loan brokers adapted the Milken model to bundle subprime mortgages (“junk loans”) for sale as high yield securities—and to bundle auto loans, student loans and credit card loans into collateralized debt obligations (CDOs). Batches of CDOs, in turn, were bundled for sale as the latest debt-fueled financial innovation. Applying “Chicago” math, each transaction was tallied as a sign of more “economic” growth as “financial creativity” became the legacy of the supply-side era.
As with junk bonds, commissions on junk loans were generous. The end results were of no concern to those originating the loans or repackaging them for sale as high yield securities. “Easy credit” (aka easy debt) lured debtors to assume obligations they often could not afford. Investors, in turn, were attracted by the high yield interest. Pension plans offered a reliable market for junk loan securities, enticed by Triple-A ratings that led pension fund managers to believe the financial risk was low.
Local Gains, Globalized Losses
By keeping interest rates low for a lengthy period (2002-2006), Fed Chairman Alan Greenspan drove up home equity values—providing collateral against which homeowners could borrow. The resulting household version of deficit spending made it appear that “economics” was booming. As a greater supply of home equity loans stimulated more consumer demand, leveraged-up firms could apply consumers’ cash to retire their junk bonds and pay down their LBO debt, further enriching the well-to-do and the financially sophisticated (the people in between).
In the 18th century, the Dutch believed that money-lending schemes (debt) could replace declining industries as an engine of growth. The U.S. drifted in the same debt-disabled direction as Great Britain when the British Empire became guilty of imperial overreach. As London emerged as a global financial center, the “economics” of the U.K. grew dependent on servicing the appetites of a globalized carriage trade. The British now find themselves held captive to the capital market whims of a worldwide financial elite, reduced to offering amnesty to Ashkenazi mobsters such as Boris Berezovsky (see the index) and coddling Russian mega-thieves such as Roman Abramovich.
Though Alan Greenspan was told that deception was increasing in mortgage markets and unscrupulous practices were spreading, he placed his faith in “financial innovation” and “the ownership society.” As he explained in his memoirs, “I believed then, as now, that the benefits of broadened home ownership are worth the risk.” But as a financial sophisticate—and one of the people in between—the Federal Reserve Chairman knew better.
In 1998, Greenspan oversaw the Fed-coordinated rescue of Long Term Credit Management (LTCM). With $4.7 billion in equity and $124.5 billion in borrowed funds, LTCM leveraged its operations into investments in financial derivatives totaling $1.25 trillion. When LTCM’s position turned sour, triggered by a default on Russian government bonds, the New York Fed, fearful that a misstep might destabilize global financial markets, brokered a bailout by the major banks and investment banks. When the smoke cleared around this debt-dependent scheme, LTCM’s investors still realized a 17% return.
A decade later, the 2007-2008 subprime mortgage meltdown reignited similar fears of systemic disorder as the credit crisis spread worldwide, facilitated by a “Chicago” consensus that ensured the globalization of debt-induced contagions. Those who recall the S&L crisis view this latest debt-fueled “pump-and-dump” as another opportunity to buy distressed properties at knockdown prices. As the winners and losers were sorted out, two clear winners emerged: the top executives of Lehman Brothers and Goldman Sachs.
Lehman, the nation’s largest underwriter of mortgage-backed securities, counterbalanced its high-risk holdings with hedging strategies. Likewise Goldman Sachs, whose staff divided a $20 billion year-end bonus pool in December 2007, after the firm announced it made more from hedging against subprime losses than it had lost on its subprime investments. Goldman’s CEO was paid $67.9 million for 2007; Lehman chairman and CEO Richard Fuld received a $35 million bonus.
As brokers, Lehman Brothers and Goldman Sachs profited by selling junk loans to others. As investment bankers, they protected the value of their own holdings with what critics called the “Houdini hedge” against potential losses. Their success came because, as financial sophisticates, they positioned themselves to profit off the debt-induced travails of others, a common tactic deployed by the people in between.
After personally pocketing more than $40 million for 2007, Lehman’s Fuld announced for the first quarter of 2008 a $2.8 billion loss for the publicly traded firm. By August 2008, the firm had lost 76% of its value. In other words, the gains were privatized (or “piratized”) while the losses were born by the public, largely by Baby Boomer retirement plans as the dominant holder of publicly traded securities. And by taxpayers because tax subsidies for retirement plans now exceed $150 billion per year.
Our Debt, Their Equity
Throughout the debt-entranced epoch since the maverick “economics” of the first Reagan administration, more firms became the target of LBOs, fueling more cutbacks in jobs, pensions and healthcare. Expenses were further reduced by moving production offshore. Those savings helped repay LBO debt while retaining access to the U.S. economy for its financial features:
- Purchasing power (demand) – to repay debt,
- Capital markets (a supply of funds) – to market junk bonds, and
- Fiscal subsidies – to repay debt and retire junk bonds.
Catalyzed by supply-side economics, wealth concentrated at a record pace as the U.S. borrowed abroad to afford tax subsidies for financial sophisticates at home. In 1982, $91 million was required for inclusion on the first annual Forbes 400 list of richest Americans. Average wealth was then $200 million on a list featuring 13 billionaires. In 1982, supply-side “economics” leveraged America’s credit capacity (and its tax base) on behalf of a handful of Americans who, predictably, became far, far richer.
By 1986, the average wealth of those on the Forbes 400 topped $500 million. From 1983 to 1998, 53% of capital market gains flowed to the top 1% of American households. By 2000, $725 million was required for inclusion on a Forbes list that by then featured 274 billionaires, with an average wealth of $1.2 billion.
As leveraged buyout debt was repaid, the lower costs required to service that debt drove competitors to lower their costs, too, by further reducing benefits and shifting production offshore. Those trends increased the pressure for freer trade and fewer barriers to international financial flows. It was during this period that Alan Greenspan emerged to play his enabling role in the S&L crisis prior to being named by Reagan to chair the Federal Reserve Board in 1987. Any competent game theorist (and any competent economist) could foresee the results of loading private sector leverage (debt) on top of public sector leverage (deficits).
To guard against another “true conservative” defrauding the nation, a financially savvy public must grasp the foreseeable impact of again pledging the public’s credit to finance private assets. Reagan’s maverick “economics” guaranteed results that were perfectly predictable to those sophisticated in finance and “economics” (i.e., the people in between). The next several pages explain how this massive fraud proceeded in plain view.
Closed System Finance
To grasp how financial exclusion is guaranteed to repeat generation after generation (and why “the rich get richer”), it helps to visualize how finance operates as a “closed system.” As consensus “economics” expanded to global scale, this closed system ensured that oligarchies would become the dominant feature worldwide.
By injecting deficit-financed funds into this closed system, supply-side policies were certain to hasten the pace at which wealth and income concentrated. That trend was catalyzed with the help of deficits that saw securitized federal debt (“treasuries”) expand from $900 billion in 1980 to a projected $10,000 billion by early 2009.
How Consensus Finance Creates Oligarchies
Sources of Funds – Today’s Closed System of Finance
RETAINED EARNINGS AND PROFITS – Reinvested for current owners
DEPRECIATION RESERVES – Reinvested for current owners
DEBT – Repaid on behalf of current owners
EQUITY – Most affordable by current owners
This chart shows how the “operating system” of private sector finance pre-determines ownership patterns—regardless to what use finance is applied. This closed system operates in plain sight yet invisibly—except to the people in between knowledgeable about finance. This chart also explains why those who specialize in financial services now dominate the Forbes 400. This section explains what financial sophisticates understand that enabled them to grow rich as the nation sank deeper into debt.
As a general rule, internal funds account for 75% of all monies raised each year. Retained earnings and profits, of course, are reinvested for current owners. Likewise for depreciation reserves. Depreciation protects private property by allowing owners to recover the cost of their income-producing assets (buildings, equipment, machinery, etc.) before paying tax on the income those assets produce.
Tax deductions (“write-offs”) for depreciation typically account for 90% of internal funds, or two-thirds of all funds (90% of 75% = 67%). Prior to the supply-side era, the write-offs allowed each year matched the useful life of an asset: the cost of a depreciating asset could be recovered as it wore out or became obsolete. Supply-side economics increased the amount—and hastened the pace—of those deductions.
Stagflation during the Carter era provided the rationale to shift depreciation from the physical to the financial when property owners testified that inflation had eroded the value of funds set aside to recover the cost of their property. In response, supply-siders shifted depreciation from useful life to cost recovery, and then shortened the time over which write-offs could be claimed though an accelerated cost recovery system (known as “ACRS”).
As confirmed by the “closed system” dynamics, deficits incurred to enhance depreciation were certain to most benefit those who were already most benefitted by this system. Financial sophisticates understood that. Why did lawmakers fail to anticipate such foreseeable results? Why would a presidential candidate prescribe another dose of this rich-get-richer medicine?
Any policy that fuels this closed system has the same effect. Whether taxes on profits are raised or lowered, the rich-get-richer dynamics remain unchanged. Likewise for depreciation: large or small, fast or slow, the wealth-concentrating effect remains unchanged. Similarly, interest rates on debt can be high or low—the impact on ownership patterns is identical. The only difference is the pace at which ownership concentrates. Supply-side economics quickened the pace.
Lastly, not since the days of J.P. Morgan (1837-1913), have sales of new equities (newly issued shares) accounted for more than 4% of total funds raised in any year. Those few funds are raised largely by selling shares to those who can best afford them—those already within the closed system. Plus a portion of the proceeds from any sale of new equities is paid to the people in between who handle share offerings.
Globalizing a Perfectly Predictable Disaster
After the Fall of the Wall in 1989, this closed system expanded rapidly to global scale. As soon as state-owned enterprises were transformed from public to private ownership, the “closed system of finance” began to operate. The results ensured that future ownership would be limited largely to those few owners created by the privatization process.
As financial sophisticates, the people in between understood that those initial owners (such as the Russian oligarchs) would remain the dominant owners in perpetuity. With the shift to private property, depreciation (a private property concept) protected the owners’ property as well as their income by allowing their income-producing property to be replaced from pre-tax income. Whether financing new assets or acquiring preexisting assets, the oligarchs’ wealth is now funded within the same closed system—as Harvard’s advisers surely understood.
Once Russia’s “piratization” fraud was complete, its predominantly Ashkenazi oligarchs could claim the protection of post-Soviet law as public assets attained by fraud assumed the appearance of private property. As owners of ostensibly private property, the oligarchs immediately gained access to the self-perpetuating closed system of finance. That system’s well known capacity for self-financing also ensured that their income-producing assets could pay for themselves—from the income they produce.
Post-piratization, the oligarchs no longer needed to resort to fraud, they could rely on the closed system of finance and the laws protecting private property. In time, their wealth could even be portrayed as “self made” as public relations campaigns transformed their social status from larcenous to “legitimate” as their sophisticated thievery faded from memory displaced by a belief that their vast wealth was due to their brilliance as savvy businessmen.
When Ronald Reagan won his first term as president in November 1980, Republicans also won enough seats in the Senate to become the majority and thereby control the legislative agenda. In January 1981, Bob Dole of Kansas took over chairmanship of the Finance Committee from Russell Long of Louisiana. Dole soon commenced hearings on Reagan’s supply-side prescription. The House of Representatives approved a companion bill written in the Committee on Ways and Means chaired by Dan Rostenkowski of Chicago. Within the year, Reagan’s maverick “economics” became the law of the land.
Systems’ theorists coined an acronym (POSIWID) to separate beguiling beliefs from real-world facts. Rather than being seduced by what a system is intended to do, they focus on what it, in fact, does. Both privatization and supply-side “economics” can be usefully evaluated from a POSIWID perspective: the purpose of a system is what it does.
The perilous role of belief in “economics” is evidenced by the fact that, after the collapse of the Soviet Union, the World Bank by the mid-1990s was advising privatization programs in 95 countries. As the facts of Marxist-era “economics” became apparent, nations sought relief from an earlier misplaced belief. In response, their new belief—in “Chicago” economics—typically led those nations recovering from Marxist economics to embrace a “consensus economics”—at the World Bank’s insistence—that was certain to create oligarchies.
Market Theory versus Financial Reality
Regardless of the label put on “economics,” broad-based purchasing power (demand) remains essential for healthy markets, just as broad-based ownership remains indispensable for healthy democracies. By embracing a closed system of finance certain to concentrate both wealth and income, democracies are endangered and markets undermined. That’s how the “Washington” consensus—with its roots in “Chicago” economics—put the health of communities worldwide at risk even as people sought to recover from the perils of state ownership that accompanied their belief in an earlier version of “economics.”
It is simply not credible to suggest that financial sophisticates failed to grasp the results certain to accompany these closed system dynamics. Nor is it plausible to propose that banks and investment banks failed to comprehend the foreseeable impact of supply-side economics. For example, Reagan Treasury Secretary Don Regan was chief executive of Merrill Lynch before he led the advocacy team for Reaganomics.
As this closed system became the global norm behind a façade of privatization, LBOs expanded in size and geographic reach, and oligarchs emerged worldwide. By charging a 2% management fee and pocketing 20% of any increase in value, private equity and hedge fund managers, along with bank operatives (such as Citigroup CEO Sanford Weill) joined the ranks of the super-rich. The closest analogy to this financial phenomenon is the casino skim.
The foreseeable trends now expanding rapidly to global scale include:
- As referenced earlier, the wealth of the Forbes 400 richest Americans grew by $290 billion in 2006 alone, for a combined wealth of $1.54 trillion in 2007.
- By 2008 the minimum personal wealth for inclusion on the Forbes list was $1.3 billion, up form $91 million in 1982.
- The average CEO of a large U.S. company was paid $10.8 million in 2006—364 times the pay of one of their employees, or as much pay each day as an employee takes home in a year.
The merger of finance and politics continues to gain momentum. In April 2008, Kohlberg Kravis Roberts & Co. (KKR), a private equity firm, announced that Ken Mehlman, former chairman of the Republican National Committee, had become head of global public affairs, a new position for a firm that has completed more than $400 billion in LBOs. Manager of G.W. Bush’s 2004 re-election campaign, Mehlman now serves as one of John McCain’s top fundraisers in the financial sector.
Only as this account was nearing completion did it become clear what agenda the private equity firms meant to pursue through Mehlman’s political connections. In this latest pump-and-dump, the major firms are prepared to exploit the desperation of ailing banks and concerned regulators by investing huge amounts in the nation’s largest banks. Before doing so, however, they want legislative and regulatory exemptions from rules designed to prevent conflicts of interest and the abuses known to accompany such concentrations of economic power.
As record-breaking public-sector debt was incurred to fund record-breaking accumulations of private-sector wealth, a crisis in infrastructure emerged nationwide as roads, bridges, schools, water treatment and such suffered from financial neglect. With the American Society of Civil Engineers estimating $1.6 trillion needed over the next five years, KKR, Lehman Brothers and other top-tier private equity firms are prepared to profit from the crisis.
As the rich grew vastly richer and the people in between skimmed hundreds of billions of dollars, household income stagnated. For the bulk of Americans, weekly earnings in 2007 were the same as in 2000—despite an 18% growth in productivity. Americans work two weeks longer each year than they did in the 1970s, and 350 hours longer per year than Europeans. The income of men in their 30s is 12% lower than it was three decades ago. Households led by someone 65 or under made an average 3.4 percent less in 2007 than in 2000.
As Americans bought Chinese exports, Beijing emerged as a financial superpower with $1,800 billion in foreign exchange as of July 2008. Much of that money came from American shoppers who put their faith in Chicago-inspired “economics” and “consensus” free trade. As wages stagnated in the U.S., that transfer of financial capital continued to gain momentum. For all of 1985, America’s trade deficit with China totaled $6 billion. In January 2008 alone, it totaled $61.6 billion, marking a fundamental shift in economic power. For all of 2007, imports outstripped exports by nearly $800 billion.
OPEC countries earned an estimated $690 billion from oil exports in 2006, up from $243 billion in 2000. Members of the Organization of Petroleum Exporting Countries hold petrodollar investments conservatively estimated at $3.6 trillion. In July 2008, with oil at $140 per barrel, Saudi Arabia alone tallied $1.4 billion per day for each day’s sale of 10 million barrels, or $511 billion per year. Saudi Arabia’s promise to pump 12 million barrels per day in 2009 suggests an annual revenue stream at July 2008 prices of $613 billion. Those petrodollars will need to be invested somewhere.
Fed Chairman Alan Greenspan’s inducement of sustained low interest rates persuaded Americans to borrow in order to pull more than $500 billion a year out of their home equity from 2004 to 2006. A sizeable portion of that debt-financed purchasing power (demand) found its way abroad, increasing Bejing’s supply of investment capital.
Today’s pattern of narrow “closed system” prosperity alongside widespread insecurity typifies the oligarchization that was certain to accompany the globalization of financial markets. To review highlights from these perfectly predictable global trends:
- By 2007, India’s 40 billionaires had amassed a combined wealth of $351 billion, up from a combined wealth of $170 billion in 2006.
- In 2006, China had 15 billionaires. The following year, their ranks had swollen to more than 100. By January 2008, China Daily reported 146 billionaires.
- In 2008, Forbes reported 1,125 billionaires worldwide worth $4.4 trillion, up from 946 billionaires worth $3.5 trillion in 2007 (an increase from 476 billionaires worth $1.4 trillion in 2003).
- In Indonesia, 61.7% of the country’s stock market value is held by its 15 richest families. The comparable figure for the Philippines is 55.1%, and 53.3% for Thailand.
- Port cities have mobilized to service the marina needs of the super-rich. More than 820 mega-yachts were under construction in 2007. Russian oligarchs have commissioned the most opulent yachts.
- The richest 2% of adults worldwide now own more than 50% of global assets, while the poorest half of the adult population holds 1% of worldwide wealth.
- The U.N. Human Development Report identified 2.6 billion people who lack adequate sanitation and 1.1 billion people who lack access to clean water, while one billion people live on less than $1 per day.
- Key measures of societal health either have stalled at appalling levels or worsened. The U.N. Food and Agriculture Organization announced in December 2007 a serious risk that global hunger will worsen in 2008.
- In the U.S., the number of people living under the poverty line rose by 5.7 million since 2000, to 12.5 percent of the population. The number of impoverished children increased to 18% or almost one in five children nationwide.
- Meanwhile, of the $619 billion growth in America’s total income for 2007, 42% went to the one in 400 Americans who made more than $1 million in 2006.
Passage of the North American Free Trade Agreement (NAFTA) unleashed in Mexico the consensus-assured effects of free trade in goods and capital. As imports from U.S. agribusiness undercut Mexican farmers and chain stores squeezed out small shop owners, livelihoods disappeared in Mexico and illegal immigration soared in the U.S. By 2008, the world’s second richest person was Mexican Carlos Slim Helu. In a nation of 109 million where one in five live in abject poverty, his personal wealth of $60 billion generates more earnings in a single year than the combined income of three million of his fellow citizens. His wealth surged $12 billion in 2006 alone after Mexico’s telecom firm was privatized (i.e., oligarch-ized).
Supply-side policies and post-Cold War privatization coincided with a worldwide surge in funds held by institutional investors, led by assets in U.S. pension plans ($16,600 billion as of March 30, 2007). Mandated by law to pursue only those values measurable in money, pension plans have a predictable need for new investments, making them ready purchasers of junk-loan securities marketed as Triple A-rated securities.
As consensus-educated policymakers enacted laws granting more priority to financial values, less attention was paid to protecting those values essential for healthy communities and democratic societies. Instead of people having an influence over forces that affect them, more deference was granted free-flowing capital by a public induced to believe in the wisdom of financial markets—despite the facts.
The “economics” that underlie this analysis retain their seductive allure: no investor seeks a return less than the best, and no money manager can retain his job without producing competitive returns. The result is a globalizing force, backed by international law and the World Trade Organization (WTO), that scours the world 24-7 richly rewarding those who pursue solely those values denominated in money.
In March 2008, Treasury Secretary Henry Paulson applauded the International Monetary Fund’s commitment to develop a code of “best practices.” That code is meant to guide investments by sovereign wealth funds such as China’s foreign exchange reserves or the vast petrodollars held by oil producing nations. Those funds, projected to top $17,000 billion over the next decade, will soon rival pension funds in scale and global influence. By best practices, Paulson, a former co-chairman of Goldman Sachs, meant a commitment to disavow “political motivations” (i.e., any motivation other than financial) and a pledge to invest solely on the basis of “commercial principles.”
In the consensus-speak common to Washington and Wall Street, those words signify a commitment to disregard any values other than financial. New York Senator Charles Schumer, a leading advocate of “value investing,” touts this practice as an example of “openness” consistent with democratic values. In short, a shared belief in commercial values (i.e., financial values) is poised to preempt democratic values worldwide.
At the January 2008 World Economic Forum in Davos, Switzerland, former Treasury Secretary Lawrence Summers proposed an international “code of conduct” limiting investments to “value maximization”—meaning the maximization of financial value. With the globalization of a shared mindset insistent that lawmakers grant primacy to those values calculated in money, money has gradually become democracy’s primary purpose—with perfectly predictable results (from a game theory perspective) and to the foreseeable detriment of communities worldwide. As this returns-fixated “Washington” consensus expands to global scale, America appears guilty by association.
Complicit in Concept
Is it possible that, having been educated in a shared mindset (a consensus), Americans were deceived to believe in an “economics” that imperils their freedom? Were we induced to freely commit our full faith and credit to finance a system of globalization by which we would become dominated by the very forces we freely choose? By Washington’s insistence on granting primacy to financial returns, did we evoke a global consensus to enact local laws ensuring that democratic principles would be systematically displaced in favor of financial principles?
Just as it was our “Chicago” mindset that fueled the financial forces now endangering our freedom, it is our purchasing power now fueling Beijing’s capacity to modernize its military. By inducing us to globalize a money-myopic mindset, did the people in between persuade us to make choices that divided Americans from each other—even as we freely advocated the very forces that undermined democracies and markets as other nations followed our lead?
How did this consensus belief come to dominate American culture? Originally envisioned as a form of self-governance meant to endure “for the ages,” how did American democracy come to grant deference to those values denominated in dollars? How did remote capital markets become a point of reference to which we obligingly sacrificed our democratic values at the cost of our local communities?
By reinforcing behavior measurable in money, that shared mental state has come to represent in the eyes of a bewildered global public the values for which America now stands. Those who recall our role in rescuing the world from the fascism of WWII wonder what happened to that America. Instead, claiming the moral authority of international law (and rules enforceable by the WTO), our mindset (the “Washington” consensus) is systematically displacing those values—including freedom—not measurable in money.
As this widely shared belief became the lens through which we view our world, this shared perspective shaped what America has become. As our narrow search for financial value displaced our concern for that broader array of values essential to healthy communities, financial freedom emerged triumphant. Any restraint on financial freedom is now seen as a limit on personal freedom and contrary to “best practices.” In effect, that “consensus” perspective grants unfettered freedom to the people in between.
As “our” consensus expanded to global scale, we discredited democracy by our insistence that deference be granted forces that endangered our own liberty. Could this be the indirect deception (and domination) that Israel Shahak warned is favored by “totalitarian Judaism”? [See below.] Does Talmudic extremism seek an exclusionary “economics” by inducing those who are its target to freely embrace the forces of their own exclusion? Could the globalization of consensus “economics” be how Zionism achieves its exclusivist goals?
Is the allure of this shared mindset meant to induce the “mark” to freely embrace the perfectly predictable results chronicled in this chapter? Could this be a form of systemic fraud expanding to global scale through our entangled alliance with a nation founded on the principles of fundamentalist Judaism? Is this the illusion of a common interest we were cautioned to avoid by America’s first president? Is this the enslavement of belief from which our Framers sought to keep us free?
As the demand for financial returns works its way through future generations of technological advance, the closed system of finance is certain to create oligarchies worldwide at a steadily accelerating pace. If U.S. lawmakers continue on this course, American foreign policy will be seen as the enabling force that fractured societies and undermined democracies. If, as a nation, we continue on this path, the Adam Smith vision of community-attuned markets will be displaced with distant capital markets that systematically undermine those values essential to the long-term health of communities both here and abroad.
If that “economics” is permitted the financial freedom its advocates seek, the people in between will gradually displace personal with financial freedom—based on the personal decisions that we ourselves freely make.
- Sasha Issenberg, “McCain: It’s about the economy,” Boston Globe, December 18, 2007. ↑
- Reporting on findings by the Congressional Budget Office in David Cay Johnson, “Report Says the Rich are Getting Richer Faster, Much Faster,” New York Times, December 15, 2007, p. 3. ↑
- Internal Revenue Service data reported in David Cay Johnson, “’05 Incomes, On Average, Still Below 2000 Peak,” New York Times, August 21, 2007, p. C1. ↑
- Justin Lahart and Kelly Evans, “Trapped in the Middle,” The Wall Street Journal, April 19-20, 2008, p. 1. ↑
- The “supply side” term was coined by Jude Wanniski in 1975 and popularized in The Wall Street Journal by Wanniski, economist Arthur Laffer and Journal editorial page editor Robert Bartley. Columbia University economist Robert Mundell was often associated with supply-side theory. Mundell received the 1999 Nobel prize in economic science for his analysis of monetary and fiscal policy under different exchange rate regimes. ↑
- Dow Jones & Company, the parent company of The Wall Street Journal, was acquired by Rupert Murdoch’s News Corp. in August 2007. ↑
- See General Explanation of the Economic Recovery Tax Act of 1981 (H.R.4242), 97th Congress; Public Law 97-4), Joint Committee on Taxation, JCS 71-81, December 29, 1981. ↑
- William K. Black, The Best Way to Rob a Bank Is to Own One (Austin: University of Texas Press, 2005), p. 37. Black served in numerous senior positions in the area of thrift oversight, including Director of Litigation for the Federal Home Loan Bank Board in Washington, D.C. (1984-86). ↑
- Interest payments received by individuals on U.S. government securities (“treasuries”) are reported by approximately 4% of U.S. taxpayers. Those taxpayers are dominantly upper-income households. To extend the mortgage metaphor: supply-side subsidies ensured that those few who used our mortgage to purchase their house also received the bulk of the interest payments on that mortgage. ↑
- The author was then counsel to the U.S. Senate Committee on Finance (1980-1987). ↑
- Investment banks and other financial firms pay agencies to rate assets they intend to sell as securities. Oftentimes the firms will seek a preliminary assessment before agreeing to pay the rating agency for the assessment. If the risk rating is lower than anticipated for the securities, the firm will shop elsewhere. Michael Grynbaum, “Study Finds Flawed Practices at Rating Firms,” New York Times, July 9, 2008, p. C1. Standard & Poor’s Rating Services, the largest bond-rating firm by revenue, is a unit of McGraw-Hill Companies. A July 8, 2008 report by the Securities and Exchange Commission includes revealing emails among S&P staffers, including one that read “it could be structured by cows and we would rate it.” Another read: “Let’s hope we are all wealthy and retired by the time this house of cards falters” while another proposed adjusting rating criteria “because of the ongoing threat of losing deals.” Aaron Lucchetti, “S&P Email: ‘We Should Not Be Rating It,’” Wall Street Journal, August 2-3, 2008, p. B1. ↑
- As under secretary of defense for policy, Paul Wolfowitz supervised the drafting of a 1992 “Defense Planning Guide” providing military leaders a coherent strategic framework to evaluate force and training options. Under the direction of Secretary of Defense Cheney, the “defense strategy objectives” sought “to prevent the re-emergence of a new rival” with a “new order that holds the promise of convincing potential competitors that they need not aspire to a greater role or pursue a more aggressive posture to protect their legitimate interests” and “new mechanisms for deterring potential competitors from even aspiring to a large regional or global role.” Patrick E. Tyler, “U.S. Strategy Plan Calls for Insuring No Rivals Develop a One-Superpower World.” New York Times, March 8, 1992. ↑
- LTCM included two Nobel laureate economists on its board. Harvard Professor Robert C. Merton and Stanford Professor Myron S. Scholes shared the 1997 prize for a method to determine the value of derivatives. ↑
- Stanford Kurland, former president of Countrywide Financial Corporation, one of the largest originators of subprime mortgages, founded a firm to buy discounted mortgages. Louis Story, “Pouncing on The Wounded of Wall Street,” New York Times, April 4, 2008, p. 1. ↑
- Jenny Anderson and Louise Story, “Fortunes Reverse for a Bank and Its Lender,” New York Times, June 10, 2008, p. C1. ↑
- Jenny Anderson, “Burdened by Mortgages, Lehman’s Options Narrow,” New York Times, August 22, 2008, p. C1. ↑
- A tax deduction is allowed for the cost of pension plan contributions. In addition, the earnings accumulate tax-free and tax preferences are allowed on distribution. The tax expenditure estimates by budget function for fiscal years 2007-2011 indicate a total cost of $760.3 billion for employer-sponsored plans, individual retirement plans and plans covering partners and sole proprietors (Keogh plans). Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal years 2007-2011 (Washington, D.C.: U.S. Government Printing Office, September 24, 2007), pp. 34-35. The fiscal cost of the home mortgage interest deduction for the five-year period (2007-2011) is estimated to total $430.2 billion. ↑
- During his first year as President, Reagan appointed Greenspan to his Economic Policy Advisory Board and named him chair of the National Commission on Social Security Reform. Richard Nixon resigned soon after selecting Greenspan to chair his Council of Economic Advisers. Gerald Ford retained him as chairman until Carter’ s election. ↑
- For instance New York developer Harry Macklowe bought seven Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money (seven-tenths of one percent). ↑
- In 1986, the U.S. General Accounting Office (GAO) described this phenomenon as a “closed system of finance.” In 2004, the GAO was renamed the General Accountability Office. ↑
- An oligarchy implies governance or control by a small group of people for their own interests. ↑
- The Criminal State series will chronicle how organized crime pre-positioned Ronald Reagan for the presidency. ↑
- For instance, in the largest initial public offering in U.S. history, Visa went public with an $18 billion public offering in March 2008. Wall Street firms stand to collect upward of $500 million in underwriting fees from the sale. Eric Dash, “Big Payday for Wall St. In Visa’s Public Offering,” New York Times, March 19, 2008, p. C3. ↑
- The Criminal State series will describe how debt-based monetization methods worsen the systemic dysfunctions created by the closed system of finance. Human dignity and informed choice suggest that the solution lies in the direction of monetization secured by the physical capital essential for healthy communities. ↑
- In May 2008, Fed Chief Ben Bernanke, Greenspan’s successor, opened a lending facility for banks and even brokers to swap up to $350 billion of their unsellable securities for cash or treasuries. This “trash for cash” agenda (again backed by our full faith and credit) led critics to describe the Federal Reserve as “a monetary bordello.” Gretchen Morgenson, “What a Deal: Trash for Treasuries,” The New York Times, May 18, 2008, p. BU1. ↑
- Average pay was $14.2 million in 2007 based on reported compensation for CEOs of Standard & Poor’s 500 companies. That figure is based on preliminary data from The Corporate Library drawing on 211 proxy statements filed through April 9, 2008. The median pay was $8.8 million. ↑
- Jeanne Sahadi, “CEO pay: 364 times more than workers,” CNNMoney.com, August 29, 2007. ↑
- As of May 2008, Kohlberg, Kravis Roberts & Co. had completed 160 transactions with an enterprise value of more than $410 billion. Marc Gunther, “Private Equity Goes Green,” Fortune, May 1, 2008. ↑
- Mehlman focuses on “strategic public affairs” as he communicates the public benefits of private equity to governments, third parties and non-governmental organizations. Mehlman also serves as a trustee of the U.S. Holocaust Memorial Museum. Press Release of April 16, Kohlberg Kravis Roberts & Co. ↑
- Bank shares are cheap and likely to rebound as the economy improves. In a replay of the pre-staging of the S&L fraud, private equity firms seek managerial control without the regulations intended to protect bank depositors as well as taxpayers who provide the full faith and credit that stands behind the various guarantees and subsidies provided to banks. “The Banks and Private Equity,” (op-ed), New York Times, August 3, 2008. ↑
- Jenny Anderson, “Willing To Lease Your Bridge,” New York Times, August 27, 2008, p. C1. ↑
- “Where’s the Prosperity,” New York Times, August 27, 2008, p A 22. ↑
- David E. Sanger, “Beyond the Trade Pact Collapse,” New York Times, August 3, 2008. ↑
- Peter S. Goodman, “U.S. and Global Economies Slipping in Unison,” New York Times, August 24, 2008, p. 1. ↑
- David Barboza, “Little-Known Entrepreneurs Putting China Near Top of Billionaires’ List,” New York Times, November 7, 2007. Forbes identified 66 billionaires in China. ↑
- “China has 146 billionaires,” China Daily, January 1, 2008. ↑
- Stijn Claessens, Simeon Djankov and Larry H.P. Lang, “Who Controls East Asian Corporations?” (Washington, D.C.: The World Bank, 1999). ↑
- “Where’s the Prosperity,” New York Times, August 27, 2008, p A 22. ↑
- David Cay Johnston, “Average US Income in 2006 Showed First Rise Over 2000,” New York Times, August 26, 2008, p. C3. ↑
- While counsel to the Senate Committee on Finance, the author shared responsibility for crafting federal laws that increased funds in the hands of pension fund managers from approximately $800 billon in 1980 ($1,770 billion in 2007 dollars) to $16,600 billion by March 30, 2007. ↑
- Javier Santiso, “Sovereign wealth funds boost development,” The Globalist, March 21, 2008. ↑
- Sovereign wealth funds are among the biggest speculators in the trading of oil and other commodities like corn and cotton in the U.S. David Cho, “Sovereign Funds Become Big Speculators,” Washington Post, August 12, 2008, p. D1. ↑
- Steven Weisman, “2 Foreign Funds Agree to Shun ‘Political’ Deals,” New York Times, March 21, 2008. ↑
- David Gross, “SWF Seeks Loving American Man,” Slate.com, January 24, 2008. ↑
- In July 2008, Defense Secretary Robert M. Gates acknowledged that America’s long-term national security now depends on eliminating the conditions that foster extremism by understanding and addressing “the grievances that lie at the heart of insurgencies.” Josh White, “Gates Sees Terrorism Remaining Enemy No. 1,” Washington Post, July 31, 2008, p. 1. ↑
- As a governing council under fundamentalist Judaism, the Sanhedrin was all-powerful because it was accountable only to itself. Akin to a Sanhedrin, a global capital market likewise answers only to itself based on consensus-derived commercial principles enforced by the World Trade Organization with technical and financial assistance provided by the World Bank Group. The Criminal State series will describe how complementary monetization methods can create locale-attuned purchasing power able to match unmet needs to underutilized local capacities as a means to counter the impact on communities of this finance-fixated governing system. ↑
- See Donella Meadows, “Places to Intervene in a System,” Whole Earth Review, Winter 1997. ↑