One of the businesses of Wall Street in the 1980s was the “bucket shop;” firms with networks of stockbrokers who defrauded senior citizens with phony stories about the businesses and prospects of the companies whose stocks they were selling. The companies for the most part existed only on paper, but they were legally registered with the SEC (Securities and Exchange Commission) leaving gullible and / or desperate “investors” with the impression that they were legally sanctioned by the government and therefore legitimate. And in fact, this business model moved to the mainstream of Wall Street in the tech bubble of the late 1990s and was only temporarily shut down with threats of prison terms.
With this history behind it Barack Obama and both political parties in Congress recently passed the misleadingly named JOBS bill that legalizes and institutionalizes the bucket shop business model. Matt Taibbi does a good takedown of the bill in his Rolling Stone blog, but the question that even he fails to answer is why? Why would removing legal barriers to fraud make sense to anyone? Or more precisely, to whom would doing so make sense?
The purported purpose of the bill is to make it easier for startup companies to raise capital in capital markets. Fair enough, but then why legalize fraud? The bill explicitly legalizes the telling of stories about a company’s prospects divergent from the truth in order to sell stock. In the 1980s a few of the more egregious and / or less politically connected bucket shops were shut down and their executives sent to prison for doing exactly this. So again, to whom would it be deemed legitimate to tell lies to people to part them from their money?
Readers who don’t work on Wall Street or who aren’t Barack Obama can be forgiven if no answer readily leaps to mind. So please consider the following question—what has been the source of the astounding wealth that has been concentrated in so few hands over the last forty years? There were never enough gullible seniors in all of history to pay Wall Street’s way, so there must be other ways that the money was made? By way of economic parables, I provide three different explanations below and then tie them together:
In the movie “Tommy Boy” the predatory car parts executive played by Dan Aykroyd explains to the accidental savior of a car parts factory, played by Chris Farley, that what he wants in buying the factory and firing its workforce is “the box,” the company name, so that he can sell his lower quality car parts for the premium price that the factory’s high quality products commanded. Although the movie is fiction, the strategy of making struggling companies profitable by scamming consumers into paying more for low quality products by attaching premium names to them was part and parcel of the 1980s leveraged buyouts that purported to revive American industry while making bankers and company executives fabulously rich.
As this scam can’t run-on forever without people catching on, the next step was:
Apple Computer has recently become one of the most “profitable” companies in the world by outsourcing its manufacturing to low wage manufacturers in China (primarily Foxconn). The word profitable is in scare quotes because there is no theory of capitalism that supports the claim that systematically paying labor less than its product (what labor produces less a market rate of profit) produces profits. What is produced are returns to economic power called economic rents, a form of extortion so odious to the theorists of capitalism that “capitalism” was invented to end their existence. While to most contemporary Americans the difference between profits and economic rents may seem a matter of mere semantics, so then is the difference between legal and criminal behavior when criminals write the laws.
Third, one of the main reasons why banks in the West have historically been heavily regulated is that they have been given the right to create money. (If you don’t know this then (1) you qualify to be a professor of economics at an Ivy League university and (2) the MMT (Modern Money Theory) crowd has expositions explaining banks and money all over the web). In exchange for this right to create money banks were regulated like utilities with strict rules regarding under what conditions, and to whom, loans could be made. And they were forbidden from engaging in financial speculation that might put depositors’ funds at risk. When banking regulations were effectively eliminated in the late 1990s and early 2000s bankers quickly set about writing themselves massive paychecks with the money they had been granted the right to create.
These three corporate strategies, knowingly defrauding consumers (example: The Insurance Hoax By David Dietz and Darrell Preston Bloomberg Markets September 2007), using economic / political power to systematically underpay labor here and abroad and using a deregulated financial system premised on heavy regulation to facilitate unlimited withdrawals of social wealth by connected insiders define the methods of expropriation used by American business over the last forty years. But none of these tactics individually would account for the amount of money expropriated by plutocrats.
The linchpin in this system of expropriation is “financialization,” the modes of monetizing social wealth so that it can be effectively expropriated. Banks create money directly by making loans. Investment banks create financial instruments, such as stocks and bonds, which become monetized social wealth when they are exchanged for money. A company can be looted by granting stock options to executives that represent a substantial ownership interest in the firm. Creating the stock options requires an investment bank and creating the money to buy them (monetize them) from executives requires a commercial bank to make a loan to buy the stock, say, to the same company. (This explanation is simplistic but it captures the basic truths of what is being described).
The motivation for defrauding consumers and systematically underpaying labor that this system creates is that both increase the profits on which the value of stock granted to connected insiders is based. Should this seem legitimate, imprisoning the overpaid executives and hiring competent management at wages commensurate with what other labor earns would have this same effect and would be much more broadly socially beneficial. But this system is set up to push social wealth into ever fewer hands. And it has been used to buy our political system, to destroy labor and other organized resistance and to create a police / surveillance state that is designed to maintain this system of expropriation. Now add to this one more tool for expropriation: Barack Obama’s JOBS bill.
It is no accident that the phenomenal accumulation of expropriated wealth that has taken place in recent decades has coincided with the declining wealth and prospects of the middle and lower classes. Government policies since the early 1970s have been designed to destroy organized labor so that predator-capitalists can again underpay labor. Consumer protections have been systematically dismantled so that bait and switch tactics and outright theft by corporations face no recourse. And any legitimate “deregulation” of finance would have rescinded the right of unregulated banks to create money and any guarantees of rescue should banks fail.
The facts are that the new plutocrats are rich because they took what belonged to working people, the middle and lower classes, including wealth, incomes, social organization and our ability to act for the common good through economic, political and social cooperation and put it into their own pockets. Plutocrats argue that consumer and environmental regulations are burdensome, but burdensome to whom? If they profit from the systematic taking from consumers and the ability to destroy the environment that we depend on, then straightforwardly they profit from our loss. Fabulously well-paid bankers required a multi-trillion dollar bailout—more money than these banks earned in the entirety of their existences, less than a decade after they were given free rein to act in their own interest. And again, “freedom” to systematically underpay labor is thievery under any theory of capitalism.
So finally, why do Barack Obama and a bipartisan Congress believe that legalizing fraud is legitimate? The immediate answer is because that is all that they know. They exist in a self-legitimizing universe where if you have something it is because you earned it. The broader answer is that an economic system based on exploitation (capitalism) isn’t set up to differentiate between socially productive behavior and radically socially destructive behavior.
And notice please, Washington isn’t working to eliminate all laws, just the ones that impede the progress of social wealth from those who create it up to the plutocracy. With respect to protecting the wealth and privilege of the plutocrats, Washington (and Brussels and London) is all about laws. With strip searches and indefinite detention priority one for Washington, we are a nation of laws by the rich for the rest of us. But remember where the wealth came from. To turn a phrase, let them eat money. Strike!
Rob Urie is an artist and political economist in New York.