The late economist/urban planner Bennett Harrison and others came up with a name that’s a perfect fit to describe the economy of the last decade: “The Casino Economy”. There was a reason they called it the Casino Economy. There’s lots of losers.
Ben, of course, was an author and co-author of many books that broadcast the impacts of global and corporate restructuring. The De-Industrialization of America and The Great U-Turn tracked, starting in the 1970s/80s, capital flight, the destruction of our basic industries and industrial communities, the corporate downsizing era and the decline of the middle class. But there was always a “new, improved economy” on the horizon that would make it all better. That was supposed to be the 1990s. We’ve all heard that the ’90s and the “New Economy” ushered in a new era of the “citizen investor”. However, tens of millions of working family “investors”, whether through pension funds or the blossoming variety of mutual funds, etc., never signed up for Russian Roulette.
Because There’s Always Losers
In the last three years, a “perfect storm” of rising energy costs, record consumer and corporate debt and massive trade and current account deficits joined with unsustainable investment practices, and resulted in an economic collapse. The first recession since 1929 to be primarily caused by over-investment, these “collateral damage” investing schemes-in overseas boondoggles and sweatshops, extreme mergers, absurd dot-coms and derivative scams-all came home to roost. Enron used all of these investment tricks and more. The corruption scandals of 2001-2 completed the melt-down. Now, the world is probably in a double-dip recession, thanks partly to the scandal and continuing international disruptions.
The problem with casino bets and Russian Roulette is that somebody always loses. Working families lost big, as over $7 trillion evaporated from public equity markets. This past summer and fall, working people and seniors were helpless as their savings suffered the effects of one of the worst bear markets ever. The Dow market peak of 11,722 in January 2000 was shaved nearly in half, to the mid-7000s by the third quarter of 2002. The unemployment rate slowly climbed to 6%, through the first of a possible double-dip recession.
2002 brought the worst pension fund performance ever, as assets underperformed liabilities by 30.9%, according to Ryan Labs (Pension and Investments Online). Companies in the S&P 500 suffered an aggregate deficit of $126 billion from a combined pension surplus of $252 billion in 1999. And, during this “new economy” transition toward DC plans, stock options, and self-directed pensions, a new AARP survey of older workers found that–of those who lost money in the market had altered their standard of living, work plans or expectations about retirement. Many watched their kids’ college plans suffer. All of this has added to a growing retirement and health care crisis.
Collateral Damage Investment Schemes
And the really bad news is the crooks often used workers’ own savings, assets and insurance funds. Workers’ pension funds and savings and other institutional assets linked to workers’ capital were prime sources of investment dollars for the corporate corruption ponzi schemes, many of them criminal on a magnitude unseen since the robber barons.
A new study by the Center for Economic and Policy Research (CEPR), commissioned by the Steelworkers Union, revealed that the persistent failure of pension fund asset managers to recognize stock market fraud “so large that it should have been apparent to any careful observer” resulted in the misallocation of tens of billions of dollars in investment capital, as much as $15 billion of it “directly attributable to pension fund investment.”
“As a result of bubble induced distortions,” wrote the study’s author and CEPR Co-Director Dean Baker, “between $70 billion and $90 billion were wasted on investment in the tech sector that will produce little or no return in the foreseeable future and contributed to a dollar bubble that has cost the country more than 2 million manufacturing jobs.
“Between $12 and$15 billion of these wasted investments can be seen as directly attributable to pension fund investment,” Baker’s study concluded. Given the failure of pension fund managers to closely monitor the financial records of firms in which they held large amounts of stock, major firms like Enron and WorldCom were able to overstate their profits by billions of dollars.
“In other words, the fund managers’ failures have literally destroyed billions in wage increases that those workers had deferred in order to invest in a measure of retirement security.”
Baker’s findings estimate that poor investment practices by Wall Street firms may have resulted in the loss of over $1 trillion.
Leo Gerard, President of the Steelworkers, found especially galling the study’s finding that, since 1998, the pension fund industry has drained off between $200 and $400 billion fees for “managing” the funds. “These findings,” Gerard said, “argue forcefully for reforms which ensure that pension funds are invested in the long-term interest of their beneficiaries, instead of workers having their savings hijacked for investments in liberalized global and market policies that pose clear and present dangers to them and their families, not to mention the nation’s economic fabric.”
And, if you’ve noticed major premium increases in health care, auto and home insurance and other services, it is important to note that mainstream media have been reporting that losses in the market have eaten into reserves. Now, these large institutions-again capitalized with the “trust” funds of working people-will now have to force the beneficiaries and businesses served by the funds to make up for the losses.
Meanwhile, global investors are uncertain due to the potential for energy disruptions and further international shocks. The biggest toss of the dice seems to be war(s) without boundaries, and, seemingly, without end. The economy will not re-bound until investment in commercial and industrial investment is rejuvenated. And that’s if deflation doesn’t take the whole global economy down with it, a la Japan, or, more frightening, the Great Depression.
Ammunition to Reverse the Current Crisis?
Beyond the current crisis and quagmire, however, the power of “gray capital”, as Robin Blackburn calls the broader social retirement provision, provides hope for the future. In a new book called Banking on Death (Verso Books, 2002), Blackburn asserts, “This new economic landscape obliges progressives to advance their aims in new ways. Banking on Death argues that tax concessions should be confined to those funds which adhere to socially committed and sustainable investment programmes”
Blackburn’s premise is echoed in Hawley and Williams’s The Rise of Fiduciary Capitalism (Penn Press, 2000). Citing both the $50 billion annual tax breaks provided by government to pension funds, and the congruence, or lack thereof, among the public and universal owners on major economic policy issues, the authors here argue for a new paradigm: the involvement of the universal owners of the economy in the principle decisions that guide the economy. Quoting investor advocates Robert Monks and Nell Minnows: “Striking, therefore, is this historically new basis for a significant, although far from full, convergence between stakeholder (perhaps increasingly defined as ‘citizen’) and shareholder.(as) fiduciary, public, union, non-profit, corporate and mutual fund institutional investors come to dominate much of the ownership landscapeThe holdings of universal ownershave the characteristic of representing the entire economy.”
You’ve heard of the budding “blue-green” alliances of labor and the environmental and human rights movements that showed at the Seattle and Quebec City, right? It’s time to add gray to the “blue-green” palette. There are major new labor-environmental and community alliances, with a presence in both the U.S. and Canada, encouraging new working capital strategies to reinvest in long-term, high-road, sustainable economy strategies.
While banks and traditional venture capital firms have been sitting on the wayside, union and public pension funds are making aggressive moves to create new worker-friendly private capital and real estate investment vehicles. These investment funds, with several billion new dollars, represent some of the most important new risk capital in the markets, which have suffered worsening capital gaps since the recession.
In Canada, the Labour-Sponsored Investment Funds have become an international model for workers controlling their capital, amassing $7-8 billion (canadian). Tens of thousands of good paying jobs are being created and retained in nearly all of the country’s provinces through many years of development of this innovative model. Over a dozen union pension funds are now financing similar investment funds in the U.S. And, the U.S. and Canada’s rapidly growing socially-responsible investment community is making a difference today in their investment strategy and results. Labor/SRI coalitions have been winning shareholder campaigns against U.S. based firms utilizing slave labor in Burma, for instance.
Finally, CALPERs, the giant California pension system, has shocked the market by demanding that overseas investments in emerging markets adhere to international labor standards. They have pulled workers’ assets out of countries that resisted, and that refused to adopt basic governance and transparency requirements and protections.
Yep, there was a reason they called it the Casino Economy. And there’s many reasons to put an end to it. Wall Street should stop making bad bets with worker’s capital.
In conclusion, maybe it’s repeating myself to say thisbut I’ll say it again. The current downturn has surpassed every recession since the Depression in terms of length of job loss. And, people have lost more money on an adjusted basis than did Americans in the 1929 crash. So, we can thank Wall Street and a system that disenfranchises its own clients and beneficiaries. It’s time for the blue-green and gray.
Copyright T.W. Croft , 2003