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The most telling line from PBS’s Frontline piece ‘The Untouchables,’ on the absence of criminal prosecutions for the large-scale bank lending fraud behind the financial crisis of 2008, came when the head of the Justice Department’s Criminal Enforcement division, Lanny Breuer, voiced his concern that bringing criminal charges might cause thousands of bankers to lose their jobs. This came after voluminous evidence was provided that senior bankers, including former Clinton Treasury Secretary Robert Rubin, were culpably aware the mortgage securitization businesses they were running were purchasing, packaging and re-selling trillions of dollars of mortgage loans that were never intended to be paid. It also came after it was known the economic calamity caused by corrupt bankers cost tens of millions of people around the globe their jobs, homes, life savings and all hope for a better future.
As with nearly all reporting on the economic debacle of 2008 – 20??, the story behind the piece was placed in the past tense as regrettable events that should have been attended to but weren’t. But a number of economic reports in recent weeks place the ongoing debacle in the economy squarely in the present. The first was an update on income distribution since the Great Recession began from U.C. Berkeley economist Emmauel Saez illustrating that the benefits of the economic ‘recovery’ have gone exclusively to the reigning plutocracy, the top ‘1%’ of income earners. The second report came from retailer Wal-Mart– the initial iteration of the ‘Grand Bargain’ struck in Washington to raise taxes on the top 0.3% of income earners, that more pointedly ended the payroll tax ‘holiday’ for the working poor, caused Wal-Mart sales to materially stall. The link between the two stories is the Federal government’s role in keeping Wal-Mart’s customers shopping via the payroll tax cut and transfer payments.
Following the airing of ‘The Untouchables’ Mr. Davis tendered his resignation—a coincidence assuredly unrelated to his public explication (and implementation) of the ‘Geithner Doctrine’ of unfettered delivery of public resources to, and immunity from prosecution for crimes committed by, culpable bankers. The ‘Geithner’ in the eponymously named Doctrine refers of course to Timothy Geithner, Mr. Obama’s Treasury Secretary and ‘our man in Washington’ as he is known to Wall Street. It was Mr. Geithner who, after delivering several trillion dollars in bailout money and ongoing guarantees to the Wall Street bankers behind the most gargantuan epic of lending fraud in human history, warned of the ‘moral hazard’ of allowing portions of the mortgages taken out by defrauded borrowers to be written down to current house values lest it set a bad precedent for the newly defrauded borrowers soon to come. (Some proportion of borrowers were undoubtedly complicit in the fraud, but (1) assessing the ability to repay loans is the charge / skill of lenders, not borrowers and (2) the systematic nature of the fraud, with masses of loans preemptively identified by bank credit departments to be fraudulent ‘waived in’ by these same banks to feed their securitization pipelines, is evidence senior bankers were looting ‘their’ banks with their securitization businesses).
In a move that drives establishment ‘economists’ right up the wall, actual economist Saez provides his income distribution data sans ‘transfer’ payments like unemployment and disability benefits from the government. What his data does represent is the distribution of income from the ‘private’ economy such as wages and the monetized gains on the stocks and bonds owned mostly by the rich. As establishment economists (and Wal-Mart executives) would have it, the actual plight of the rapidly increasing numbers of poor and near poor has been (marginally) improved by transfer payments and the payroll tax cut. And since Wal-Mart volunteered for the task, it seems that Wal-Mart also benefited from the transfer payments and payroll tax cut—witness the drop in sales coincident with the end of the payroll tax cut. In fact, in a broad sense that is how transfer payments were intended to work. However, the (Keynesian) economics only work if Wal-Mart pays their workers (and suppliers) commensurate with their economic contribution. But not doing so is the entirety of Wal-Mart’s business model. And a (partial) difference between the proportionate wage and what Wal-Mart workers actually earn is a ‘gift’ from we, the people. Another way to put this is the owners of Wal-Mart are the very same reigning plutocrats benefiting from the ‘recovery’ in the ‘private’ economy that, with income distribution data at hand, wouldn’t be without the helping hand of government.
With the remainder of Mr. Obama’s Grand Bargain on (temporary) hiatus, the question for the moment is: five years into a purported economic recovery, why would re-instating the payroll tax to its prior level cause undo hardship among America’s working poor? Mr. Saez provides the answer—in 2007 the incomes of rich and poor alike fell off the proverbial cliff. The incomes of the rich have largely recovered thanks to bank bailouts, stealth transfers, ‘Quantitative Easing’ that lifts financial asset prices and ongoing government guarantees of the financial system, while the incomes of the lower 99% have continued to decline. The only source bridging this shortfall for all but the very rich has been the Federal government. Re-instating the full (regressive) payroll tax appears to be causing a near instantaneous reaction from the American ‘consumers’ who, because of its regressive nature, would be expected to be most affected by the change. Until there is a recovery in the ‘private’ economy that boosts incomes and employment, any reduction in government payments will quickly become evident in the economies of the growing numbers of poor and near poor. And any suggestion from the wealthy that they, the wealthy, are not the ‘dependent’ class is an ignorant lie. Remove government support for the financial economy and stealth wage subsidies for the rich and this would be evident within minutes.
What then is the relation between the bank lending fraud behind the housing bubble, the continuing decline in the economic fortunes of the great majority of the population and government ‘efforts’ to restore a functioning economy? Bank lending fraud produced three main outcomes—(1) wildly inflated house prices, (2) the placement of a significant proportion of the population into permanent debt servitude against houses now worth far less than the money owed against them and (3) crashing the global financial system, and with it the global economy. In the aggregate, those with mortgages now earn less than they did when they took out the mortgages and the houses they bought / re-financed in the housing bubble are worth less than the mortgage amounts owed against them. In this context, government efforts to restore the Wall Street banks behind this fiasco while doing little / nothing to extinguish the ill-gotten debts leaves most Americans (and peripheral Europeans) in a debt-deflationary spiral. Put another way, companies won’t hire despite alleged government efforts to ‘fix’ the economy because as they see it, the economy has still not been fixed. Those that are hiring are systematically underpaying labor because of weak labor market conditions. And banks (thankfully) won’t lend because they’ve turned their prospective retail customers into debt slaves unqualified for additional credit because of the economic circumstances they (the banks) created.
Between 1950 and the mid-1970s government transfer payments, including unemployment benefits, bridged lost ‘consumption’ in the temporary recessions engineered by the Federal Reserve to keep labor ‘pliable.’ The Federal Reserve would raise interest rates to dampen ‘inflation,’ a/k/a increasing wage demands, unemployment would rise, the Fed would then lower interest rates and unemployment would fall. Unemployment benefits (transfer payments) were designed to last the approximate length of these engineered recessions. They provided incomes lower than wages but high enough to keep the masses from starvation until the jobs returned. Beginning around 1990 bouts of unemployment began to outlast unemployment benefits. (Source data: St. Louis Fed; 12 month rolling difference Fed Funds versus 24 month forward 12 month rolling difference Civilian Unemployment Rate, 1954 – present). Additionally, proportionally fewer unemployed have been eligible for unemployment benefits in recent decades. Despite extending eligibility for Federal unemployment benefits for up to two years in the Great Recession, millions of unemployed have run out of benefits without finding new employment. And reversing the payroll tax cut is in no way ‘symmetrical’ with raising marginal tax rates by 2% on top earners (the Obama ‘compromise’). As Wal-Mart sales are demonstrating, the economic fragility of the poor and near poor shows up instantly in their inability to buy basic necessities whereas the tax increases on the top 0.3% are not material to levels of consumption given very high levels of income.
Mainstream economists consider all of this—the impoverishment and debt servitude of the masses and the continuing decline in our economic fortunes, to be unfortunate accidents. Liberal economists add that Keynesian policies to support ‘the economy’ could lessen the economic impact of the Great Recession and with it the attendant human misery. Left unsaid is that the bankers who created this circumstance are in every way benefiting from it. Through Bush and Obama administration actions banks received ‘no-strings’ bailouts to recover their ‘businesses’ while those who owe the banks have lost their houses and / or are permanent debt slaves to them as their incomes decline. Bank debts are repaid in the quantity the money was borrowed in whereas declining asset values allow the banks to use that money to buy assets for less money. Weak labor markets allow businesses to systematically underpay labor leaving more revenues with which to repay business loans. And banks have been granted the franchise to create money through the existing debt based money system meaning they control its creation, and through it, the political system and ‘the economy.’ But more than just bankers have seen their incomes recovered—the reigning plutocracy including industrialists, bankers and inherited wealth, a veritable ‘ruling class,’ have seen no effort spared by the Federal government and the Federal Reserve to restore their lot to its former level. Explanations of accidents—both of nature or economic policy, fill the mainstream whereas true accidents wouldn’t so unwaveringly fill the pockets of the rich and connected.
Of current interest is that there is no self-generating economic recovery for all but the very richest, at least none to be found in the income distribution data. Given the only time in prior U.S. history most citizens lost as much income as in recent history was in economic depressions, the 99% entered an economic depression in 2008 that has, outside of help from the Federal government, only gotten worse since then. This help from the Federal government is ending, beginning with restoration of the full payroll tax. The fools, crooks and sociopaths running the banks were left in place and the ‘liquidity’ provided by the Federal Reserve is fueling new and ‘exciting’ speculative bubbles. The banks retain social control through debt servitude and political and economic control through their franchise to create and control debt-based money. The mainstream press reports ‘the world’ is back to business as usual and except for the economic lot of the overwhelming majority of citizens of the West, they are correct.
Current focus by the ‘liberal’ Obama administration on raising the minimum wage is better than a kick in the teeth, but all the solutions being proposed to recover a functioning economy assume ‘the economy’ was functioning before the onset of the Great Recession in 2007. In fact, while it was unknown in 2005 that the banks would need (and receive) trillions of dollars in emergency welfare assistance, history revealed that such was the case. It is this system of massive corporate welfare grants under duress used to restore the fortunes of the already rich that is the only aspect of ‘the economy’ that has been recovered. Additionally, the current system of debt-based finance guarantees environmental rape and pillage to sustain the cash flows required for debt service. At this point in history the world can ill afford more environmental destruction because of global warming. A government jobs program designed to build out an environmentally sustainable economy is likely the only solution to the end-time scenarios currently being orchestrated in the capitols of the West. Such a program could provide guaranteed employment to all comers at the minimum wage adjusted for both inflation and productivity gains (about $16.50 per hour) plus health care through Medicare. Through subsidies and state-granted monopoly power private employers are already receiving the difference between these wages and what they are actually paying ‘their’ workers. As there isn’t a snowball’s chance in hell this program will be implemented short of a credible threat of revolution, please enjoy whatever they’re showing on television these days.
Rob Urie is an artist and political economist in New York