Republican Financialization of Our National Economy

Former Goldman Sachs Executive Director Greg Smith recently resigned from the banking giant, and today, 3-14-2012, in a New York Times op-ed blew the whistle on what he called a "toxic and destructive" environment within the bank. Smith writes, "I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it."

Smith went on to write that banksters at the firm "callously" rip their clients off - and routinely refer to their customers as "muppets." Most shocking, Smith reveals that the most common question he gets from fellow banksters is, "How much money did we make off the client?"

The dangerous part of this is that banksters like Goldman Sachs now make up more than a quarter of our economy when they used to make up less than a tenth. That means one-fourth of all the money in the United States comes from banksters on Wall Street preying on their customers with things like exploding mortgages and fees, jacking up oil and food prices by gambling on them, and making a profit crashing entire nations economies.

Uploaded from: Leonard N. Stern School of Business at New York University. (leads to blog) - Thomas Philippon, The future of the financial industry. The graph is directtly from: http://3.bp.blogspot.com/_v3_kw7R30BI/SPdjzUeM9DI/AAAAAAAAADk/cwSlKhfq9Lw/s1600-h/finshv.jpg

 What is happening is called Financialization.

Financialization is a term sometimes used in discussions of financial capitalism which developed over recent decades, in which financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics.

Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments.

Workers, through a financial instrument such as a mortgage, could trade their promise of future work/wages for a home. Financialization of risk-sharing makes all insurance possible, the financialization of the U.S. Government's promises (bonds) makes all deficit spending possible. Financialization also makes economic rents possible.

• Michael Hudson summarized financialization in a 2003 interview:

Companies are not able to invest in new physical capital equipment or buildings because they are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond holders. This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions. The upshot is that the traditional business cycle has been overshadowed by a secular increase in debt. Instead of labor earning more, hourly earnings have declined in real terms. There has been a drop in net disposable income after paying taxes and withholding "forced saving" for social Security and medical insurance, pension-fund contributions and–most serious of all–debt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance and other FIRE-sector charges. ... This diverts spending away from goods and services.

• Sociological and political interpretation have also been made. In his 2006 book, American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, American writer and commentator Kevin Phillips presented financialization as “a process whereby financial services, broadly construed, take over the dominant economic, cultural, and political role in a national economy.” (page 268). Philips considers that the financialization of the U.S. economy follows the same pattern that marked the beginning of the decline of Habsburg Spain in the 16th century, the Dutch trading empire in the 18th century, and the British Empire in the 19th century: (It is also worth pointing out that the true final step in each of these historical economies is; collapse)

... the leading economic powers have followed an evolutionary progression: first, agriculture, fishing, and the like, next commerce and industry, and finally finance. Several historians have elaborated this point. Brooks Adams contended that “as societies consolidate, they pass through a profound intellectual change. Energy ceases to vent through the imagination and takes the form of capital.”

Bain Capital Partners, of which Mitt Romney was a co-founder, president and CEO of, operates entirely by the process of financialization. Hedge funds, large banks, investment brokers, insurance funds, and commodity traders all are operating on this principle and pushing for greater GDP prominence. 

The roots of financialization can be traced to the rise of Neoliberalism and the free-market doctrines of Milton Friedman and the Chicago School of Economics, which provided the ideological and theoretical basis for the increasing deregulation of financial systems and banking beginning in the 1970s. Notre Dame heterodox economist David Ruccio has summarized the politico-economic philosophy of Friedman and the Chicago School as one in which “markets, private property and minimal government will achieve maximum welfare.”

Milton Friedman was an economic adviser to President Ronald Reagan. Under Reagan the traditional model of Keynesian Economics was replaced with the Friedman economic model as defined above. Friedman was first a supporter of the Keynesian model during the FDR administration and acknowledged that it was responsible for the recovery of the economy after the collapse in 1929 and thus the Great Depression. However, later he developed his Chicago School of Economics and an entirely new approach that was more in line with the Conservative ideology of less government as promoted by Sen.Barry Goldwater, R-Arizona and who ran against Lyndon Johnson for President, Johnson won. Milton had to wait until Richard Nixon to start to insert his ideology into economic policy. Under Nixon it was not a huge shift at that time, but by the time Ronald Reagan became president with a Republican Congress, the shift was swift. The only thing that stood in the way of completing this conversion was the repeal Glass-Steagall Act of 1934, which was accomplished by a major lobbying by CitiBank in 1998-1999 of the Republican controlled Congress and unfortunately the repeal was signed by Pres. Bill Clinton under advisement by one his economic advisers who happen to come from CitiBank. Once the repeal was accomplished, the total shift was in place and the financial sector took off with growth to GDP at astronomical level.

 Financial turnover compared to gross domestic product
Other financial markets exhibited similarly explosive growth. Trading in U.S. equity (stock) markets grew from $136.0 billion or 13.1 percent of U.S. GDP in 1970, to $1.671 trillion or 28.8 percent of U.S. GDP in 1990. In 2000, trading in U.S. equity markets was $14.222 trillion, or 144.9 percent of GDP. Most of the growth in stock trading has been directly attributed to the introduction and spread of program trading.
According to the March 2007 Quarterly Report from the Bank for International Settlements (see page 24.):

Trading on the international derivatives exchanges slowed in the fourth quarter of 2006. Combined turnover of interest rate, currency and stock index derivatives fell by 7% to $431 trillion between October and December 2006.

Thus, derivatives trading – mostly futures contracts on interest rates, foreign currencies, Treasury bonds, etc. had reached a level of $1,200 trillion, $1.2 quadrillion, a year. By comparison, U.S. GDP in 2006 was $12.456 trillion.

The data for turnover in the futures markets in 1970, 1980, and 1990, is based on the number of contracts traded, which is reported by the organized exchanges, such as the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Commodity Exchange, and compiled in data appendices of the Annual Reports of the U.S. Commodity Futures Trading Commission. The pie charts below show the dramatic shift in types of futures contracts traded from 1970 to 2004. For a century after organized futures exchanges were founded in the mid-19th century, all futures trading was solely based on agricultural commodities.
But after the end of dollar gold-backed fixed-exchange rate system in 1971, contracts based on foreign currencies began to be traded. After the deregulation of interest rates by the Bank of England, then the U.S. Federal Reserve, in the late 1970s, futures contracts based on various bonds / interest rates began to be traded. The result was that financial futures contracts - based on such things as interest rates, currencies, or equity indices - came to dominate the futures markets.



The dollar value of turnover in the futures markets is found by multiplying the number of contracts traded by the average value per contract for 1978 to 1980, which was calculated by ACLI Research in 1981. The figures for earlier years were estimated on computer-generated exponential fit of data from 1960 to 1970, with 1960 set at $165 billion, half the 1970 figure, on the basis of a graph accompanying the ACLI data, which showed that the number of futures contracts traded in 1961 and earlier years was about half the number traded in 1970.

According to the ALCI data, the average value for interest rate contracts is around ten times that of agricultural and other commodities, while the average value of currency contracts is twice that of agricultural and other commodities. (Beginning in mid-1993, the Chicago Mercantile Exchange itself began to release figures of the nominal value of contracts traded at the CME each month. In November 1993, the CME boasted it had set a new monthly record of 13.466 million contracts traded, representing a dollar value of $8.8 trillion. By late 1994, this monthly value had doubled. On. Jan. 3, 1995, the CME boasted that its total volume for 1994 had jumped 54%, to 226.3 million contracts traded, worth nearly $200 trillion. Soon thereafter, the CME ceased to provide a figure for the dollar value of contracts traded.)

The bottom line is that the value of work (labor) to create goods and services is becoming less and less, therefore, only those who have the money to play in the financial markets will earn an income with disposable income sufficient to create limited demand for themselves. Thus their will be only a small need for actual labor, especially since automation has replaced most labor need and has reduced the cost of productivity to a level that it is becoming less and less costly to produce a commodity. Massive chronic unemployment will be the norm in this new economy. In the end, America will be a welfare state in as much as that will be the only source of basic needs to sustain the population. There will not be enough employment demand to employ the populace. Welcome to the 21st Century...

The Party People of Wall Street

January 30, 2012

by Bill Moyers and Michael Winship

 

from the Southern Labor Archives at Georgia State University - American Gilded Age Cir. 1899

A week or so ago, we read in The New York Times about what in the Gilded Age of the Roman Empire was known as a bacchanal – a big blowout at which the imperial swells got together and whooped it up.

This one occurred here in Manhattan at the annual black-tie dinner and induction ceremony for Kappa Beta Phi.  That’s the very exclusive Wall Street fraternity of billionaire bankers, and private equity and hedge fund predators.  People like Wilbur Ross, the  vulture capitalist; Robert Benmosche, the CEO of AIG, the insurance giant that received tens of billions in bailout money; and Alan “Ace” Greenberg, former chairman of Bear Stearns, the failed investment bank bought by JPMorgan Chase.

They got together at the St. Regis Hotel off Fifth Avenue to eat rack of lamb, drink and haze their newest members, who are made to dress in drag, sing and perform skits while braving the insults, wine-soaked napkins and petit fours – those fancy little frosted cakes — hurled at them by the old guard. In other words, a gilt-edged Animal House, food fight and all.

This year, the butt of many a joke were the protesters of Occupy Wall Street. In one of the sketches, the bond specialist James Lebenthal scolded a demonstrator with a face tattoo, “Go home, wash that off your face and get back to work.” And in another, a member — dressed like a protester – was told, “You’re pathetic, you liberal. You need a bath!”

Pretty hilarious stuff. The whole affair’s reminiscent of the wingdings the robber barons used to throw during America’s own Gilded Age a century and a half ago, when great wealth amassed at the top, far from the squalor and misery of working stiffs. Guests would arrive in the glittering mansions for costume balls that rivaled Versailles, reinforcing the sense of superiority and the virtue of a ruling class that depended on the toil and sweat of working people.

That’s consistent  with the attitude expressed by several of these types after Occupy Wall Street sprung up; bankers told the Times on the record that they could understand the anger of the protesters camped on their doorstep;  but privately, a  hedge manager said, “Most… view [it] as ragtag group looking for sex, drugs, and rock ’n’ roll.”

So sayeth the winners in our winner-take all economy.  The very guys who were celebrating at the St. Regis because they were too big to fail. Even when they fell flat on their faces, the government was there to dust them off, bail them out and send them back to fight the class war with nary a harsh word or punishment. Talk about a nanny welfare state.

None of this was by accident. The last three decades have witnessed a carefully calculated heist worthy of Robert Redford and Paul Newman in “The Sting” — but on a massive scale. It was an inside job, politically engineered by Wall Street and Washington working hand-in-hand, sticky fingers with sticky fingers, to turn the legend of Robin Hood on its head – giving to the rich and taking from everybody else. Don’t take our word for it – it’s all on the record.

The biggest of the big boys was Citigroup, at one time the world’s largest financial institution. When the meltdown hit in 2008, the bank cut more than 50,000 jobs and you and other taxpayers shelled out more than $45 billion to save it. And how are Citigroup executives doing? Nicely, thank you. Last year, its CEO, Vikram Pandit, took home $1.75 million in base salary, and was awarded $3.7 million in deferred stock.
According to the Times, “Citigroup is expected to disclose the rest of his pay, cash, be it upfront or deferred, in March. In addition, while not necessarily for work performed in 2011, Mr. Pandit last year was awarded a $16.7 million retention bonus, plus stock options that could add $6.5 million to the package’s overall value.” Makes you want to cry out, “Retain me! Retain me!”

To be fair, Vikram Pandit was at the World Economic Forum in Davos, Switzerland last week, where he told Bloomberg News, “It’s important for the financial system to acknowledge that there’s a great deal of anger directed at it… Trust has been broken. Banks have to serve clients, not serve themselves.” What’s more, he has said that the “sentiments” expressed by Occupy Wall Street demonstrators were “completely understandable.”

This, in contrast to the financial industry official who told a reporter that the protesters’ issues were “a lot of sound and fury, signifying nothing.” Or, as they used to say while partying down at the court of Louis XVI and Marie Antoinette, let them eat petits fours.

~*~*~*~*~*~*~*~*~*
Thank you Bill and Michael, great comparison.

It is amazing that we are repeating history, which means we have forgotten the lessons learned from the Gilded Age and the Roaring Twenties in America, which ultimately led to the "Great Depression." In response to these excesses by the rich and the huge disparity of wealth between the rich and working class, Congress passed the Glass-Steagall Act that keep the investment banks, commercial  banks, mortgage banks and insurance business entirely separate.

Why?

• So that the commercial banks, those banks that took in deposits from ordinary citizens to hold for them and to loan that money to low risk borrowers, could not take your savings deposits and use them on very speculative and high risk investments for the bank that have a high risk of loss of your money, not theirs, but they kept all the gains when they performed well, which occurred in the 1920s. 
• Investment banks and brokerage firms took peoples money who wanted to invest in all levels of risk investment, like company stock trading, government and corporate bond trading, currency trading, foreign stocks & bond trading, commodities trading, and so on and so on...  
• Insurance companies were mainly what was called mutuals, that meaning the policy holders were the share holders and received the benefits of any gains on the premium money they had paid, but not used, thus the insurance company invested that money in safe to moderate risk investments, like real estate loans for large commercial projects, like office building, shopping centers, etc. 
• And up until the 1980s, there were what was called Savings and Loans that did nothing more than accept deposits from ordinary citizens as certificates of deposits or pass-book savings (no checking or other services were allowed) and with that money they loaned it to home buyers as mortgages. The buyer had to have good credit and sizable down payment to receive a mortgage from them. The interest they received from these mortgages, they used to pay operating costs pay the interest on the CDs and Pass-book savings accounts depositors had with them. They didn't have access to the "discount window" at the Federal Reserve. They were completely dependent on depositors for money to loan. Many of these Saving and Loans operated like Mutuals and Credit Unions, in which the depositors were the share holders of these companies. Most of these were small local saving and loan companies, a few national ones were publicly traded companies.

Ronald Reagan deregulated Savings and Loans, "So they could become competitive with commercial banks and commercial banks could capture more of the residential mortgage business. In the end, the cooruption that followed the deregulation led to the financial ruin of these savings and loans, having the government bail them out in billions of dollars of tax payer money.

This in turn taught a lesson to the banking industry, the nanny state will take care of them and they will be covered for any losses from risky practices.

So in the 1990 Citibank and Travlers who wanted to merge, went after Congress with big, big money and lobbied to repeal Glass-Steagall, which by law kept them apart. Congress of both parties said yes and Bill Clinton signed the repeal act.

Now the race was on to hype their investments with all sorts of derivatives, as they called them, such as the "Mortgage Back Security" that had been created because these banks were giving out mortgages to any willing borrower, regardless of their ability to repay them. 

These were the interest only for the first 10 years and then a big balloon payment of the principal, or variable interest loans that start out very low and grow over time with a big balloon at the end. Then these banks went to AIG and purchased default insurance because they knew in time they would go bad and just be junk. They paid the investment rating companies to give them AAA rating, but should have been rated as EE junk investments.

Lehman Brothers, Citicorp, Goldman Sachs, all sold them around the world, knowing full well they were to about bust into junk. In September of 2008, that is exactly what happened and the deepest recession since the Great Depression hit the entire world. G.W. Bush with the help of Treasury Secretary Henry Paulson, who came from Goldman Sachs, came up with trillions of dollars to bail out these banks because they were "Too Large To Fail." Henry Paulson convinced Congress to authorize this money, as well as G.W. Bush. There was no strings attached, no required pay it back, unless you want to.

This is exactly what the banks knew would happen after seeing what the Treasury did for the Savings and Loan collapse. However, this time, these large banks submitted claims to AIG to cover their loss from these bad derivatives. AIG didn't have enough reserves to pay these billions of dollars, so they got bailed out by Sec. Paulson to the tune of tens of billions of dollars to pay these policies to the very banks that got bailed out by Paulson also. So you the tax payer were paying twice for this reckless behavior of the banks.

So these banks, plus Wells Fargo, Chase, and other used the billions they got from Congress to buy other banks and companies that were in weaker position, because they didn't have a connection to Sec. Paulson. The mega mergers then completed the restructuring of the entire banking and financial industry into the hand of just a few very large companies that are now even more too big to fail.

The banks and Wall Street titans are now in control of everything in America. If it doesn't benefit them in any way, then don't bother with it, is the attitude of them and that is how Congress is behaving, on both sides of the isle.

Now do you understand what's happening during this election cycle and the prior ones as well? They are wanting to finally eliminate any variables that you the citizen might cause in their quest to obtain as much wealth as possible, regardless of the long term consequences to the rest of the world population.

So for those who vote Republican, you are speeding this process along for them because the candidate are all bought and paid for by these titans. For those who vote Democratic, you are slowing the process, because there is still some resistance in that party to what is happening and are more willing to pass a constitutional amendment and laws to change thing back to the power of the people. But the longer this is delayed and the more power given to Republicans, the more likely the reversal can ever happen.

That is what is at stake, in addition to who is in the White House that will appoint the next couple of Supreme Court justices. If they are in line with the Robert's court, then whatever these banking titans want will be approved by the Supreme Court, as was Citizens United case was.

Once the three branches of power are bought and paid for by these people, they have absolute control over everyone. Any glimmer of democracy will be gone totally. Any public elections, like in the old Soviet Union, will be for show and nothing else. The outcome will be predetermined by this oligarchy.

Shit Wall Street Bankers Say: 'We Don't Make Enough Money' | Common Dreams

Shit Wall Street Bankers Say: 'We Don't Make Enough Money' | Common Dreams