Oh, Brother Can You Spare A CDS? Financialism Erodes Free Market Capitalism

   “They used to tell me I was building a dream, and so I followed the mob,
    When there was earth to plow, or guns to bear, I was always there right on    the job.
    They used to tell me I was building a dream, with peace and glory ahead,
    Why should I be standing in line, just waiting for bread?

One out of every 44 homes in the Las Vegas, NV metropolitan area is in foreclosure. [Vegas Inc] Nevada has a 13.4 unemployment rate.  The Las Vegas area is still experiencing 14.2% unemployment, the Reno-Sparks area 13.2%, and the Carson City area 12.7%. [DETR] 115,745 children in the state of Nevada are living in financial strapped homes, with income below the ‘poverty line.’ [NCCP] 25% of those children are living in homes where there is a least one parent employed full time.  44% of the youngsters are living in homes where a parent is employed part time or part of the year.  32% are living in homes where a parent is unable to find work. [NCCP]

In 1995 the average median wage for Nevada workers who qualified for unemployment compensation under the terms of NRS 612 was $25,708, in 2010 it was $39,629.  [DETR] Average median wages went up by $13,921 which would be a pleasant increase were it not for the fact that median wages were hard pressed to keep up with inflation during that period. [SSA]

Health care costs per capita for both treatment and insurance in the United States between 1970 and 2008 rose faster and higher here than in any other developed country.  [KFF] Between 1982 and 2007 college tuition and fees increased by 439%, national median family income increased by 147%.  [NYT]

In short, Nevadans and all other Americans, were “right on the job,” trying to build their own American Dreams.   So, why are 13.4% of workers in Las Vegas unemployed?  Why are 115,745 children in Nevada living below the poverty line?  Why is the prospect of an education — clearly linked to lower unemployment rates — becoming increasingly unattainable for American families?

   Once I built a railroad, I made it run, made it race against time.
    Once I built a railroad; now it’s done. Brother, can you spare a dime?
    Once I built a tower, up to the sun, brick, and rivet, and lime;
    Once I built a tower, now it’s done. Brother, can you spare a dime?

Perhaps because, as the song says, we built things.  We, as a country, built automobiles, refrigerators, washing machines, television sets. We manufactured tires, and carpets, and clothing, and toys.  We built airplanes, and tricycles.  We manufactured travel trailers and camping stoves.  We built office buildings and bungalows.  Why did we lose so many jobs?

  Once in khaki suits, gee we looked swell,
        Full of that Yankee Doodly Dum,
        Half a million boots went slogging through Hell,
        And I was the kid with the drum!

What did we discover when unemployment for veterans was studied in 2010? “Young male veterans (those ages 18 to 24) who served during Gulf War era II had an unemployment rate of 21.9 percent in 2010, not statistically different  from the jobless rate of young male nonveterans (19.7 percent).” [DoL]   The AFL-CIO called unemployment among Iraq-Afghanistan veterans a ‘quiet crisis,  ‘The Bureau of Labor Statistics reported that unemployment rate for Iraq and Afghanistan veterans was 12.4 percent in July, up from 11.8 percent in July 2010. In August, the jobless rate for these veterans had dropped slightly to 9.8 percent, but it does not include veterans who are underemployed or have stopped looking for work.”  Why aren’t there jobs for returning soldiers, sailors, airmen and women, and Marines?

    Say, don’t you remember, they called me Al; it was Al all the time.
    Say, don’t you remember, I’m your pal? Buddy, can you spare a dime?

What happened?

American workers didn’t change.  They are still capable of building railroads, office buildings, homes, and schools.  They are still able to build automobiles, airplanes, and dining room tables.  The workers didn’t suddenly become unproductive, indeed American productivity has increased by 2.7% annually since 1987.  [BillShrink]

If workers didn’t change, what happened in the last three decades to alter the economic system in which we live?  What happened to Free Market Capitalism that it could no longer channel savings into investments in American manufacturing, and long term American infrastructure construction and maintenance?

Tom Armistead, contributing writer for Seeking Alpha, has the answer: “Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments.”  And the implications of this ‘primary activity?’

“…financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own, a weird shadow dimension, a hall of mirrors, a distorted alternate reality that intersects and reacts with the real economy in unpredictable and destructive ways. “

Ed Hess, writing for Forbes magazine, provides more specifics:

“Over the last 25 years American capitalism has become financialism, which is primarily transactional, unrestrained greed. Financialism embraces the view that the only purpose of business is to create shareholder value, measured primarily by short-term results. The dominance of short-termism is evidenced by the magnitude of institutional stock “renting” for terms of 12 months or less, the volume of high-speed, high-frequency algorithmic short-term trading, the short average tenures of chief executive officers and the dominance of executive compensation tied solely to short-term results.”

Expressed more simply, when Financialism overtakes Free Market Capitalism there is less incentive for long term investment, for larger and more tangible results in construction, manufacturing, and transportation.  There is more incentive for short-term trading profits, and far more propensity for volatility.   IT becomes all about how much, how fast, and how profitably a person can make short term transactions.

Hess continues:

“As financialism has come to prevail over the last 25 years or so, the economic condition of the U.S. has in many ways weakened, with middle-class income stagnation, increased income inequality, the exporting of jobs and our manufacturing capacity and increased risks of financial volatility.

I am concerned that the wise men of Wall Street have lost sight of or forgotten a fundamental point: that no economic system can survive if it doesn’t produce reasonable results for most of its members. That doesn’t mean income equality, but it does mean that the system has to work well enough to keep most of its citizens believing in it and playing in it.” [emphasis added]

Suzanne McGee, a writer for Barron’s, added her analysis in Chasing Goldman Sachs.”   Her version of Financialism emerges in the early 1980s:

“…beginning in the 1980s, several things happened that took Wall Street in a very different direction. One was the rise of a shadow banking system, in the form of hedge funds and private equity firms. These lightly regulated entities earned outsize returns by pursuing risky strategies that would have been unthinkable for most traditional Wall Street banks; over time, private equity firms and hedge funds became the Wall Street banks’ best clients.”  [WaPo]

The drive for short term maximized profits defined by Armistead and explained by Hess, is further examined by McGee:

“The drive to maximize profits to shareholders, to improve the return on equity — the ultimate yardstick used when “chasing Goldman Sachs” — led Wall Street firms into all sorts of behavior that separated their best interests from society’s. Whereas the earlier structure of private partnerships encouraged bankers to keep track of the overall risks their firms were undertaking, the growth and profit imperatives of shareholder companies meant one thing only: Make more deals to generate more fees.”  [WaPo]

In other words, when “manipulating financial instruments” becomes the primary activity, when it values short term gains above long term investment and stability, and when the drive for short term profits becomes the “ultimate yardstick,”  then the Free Market Capital system devolves from transferring wealth into productive investment to pouring paper into the shadows to make a quick profit.

Immediate “Shareholder Value” is better served by lowering wages than by investment in factory modernization.  Immediate “Shareholder Value” is better promoted by off-shoring and outsourcing jobs than by training new employees.  Immediate “Shareholder Value” is more rewarding when infrastructure expenses can be minimized.

Simon Johnson, former IMF chief economist describes this new Financial Sector:

“From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.”  [Atlantic]

However, the point is not that the financial sector grew — much of that can be explained by the demand for financial services in new markets overseas — but that along with the increasing share of domestic profits and copious executive compensation the financial sector has absorbed to itself an inordinate amount of political and economic clout.

“Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.”   [Atlantic]

The mindset of American commercial interests evolved from “The Business of America is Business,” to the Business of America is Banking.  “What’s good for General Motors is good for America” (Charles Wilson, Pres. GM 50 years ago) has become “What is good for Wall Street…”

Gradually becoming swamped by the Wall Street boosters of Financialism is the notion that the financial sector is only ONE part of our complete economy.  It is an absolutely important sector, but so is manufacturing, and so is retail merchandising.   Investment and finance has transformed from serving to channel funds into productive forms of business investment for its clients  into a behemoth that primarily profits from proprietary trading for itself.

Why should the practitioners of Financialism be overly concerned with securing capital for factory expansion or modernization when there are more profits to be made in high volume trading?  Why should our Financialists be concerned with small business lending when there is more profit to be derived from credit default swaps?   The financial sector which once acted analogously to the heart pumping blood through the veins and arteries of American commerce, has reserved to itself the vital liquidity needed to finance American businesses.

And so, the bankers fight to secure Free Trade Agreements to facilitate the free movement of capital across borders, to repeal the modest financial market reforms in the Dodd-Frank Act, to prevent the full implementation of the  Consumer Financial Protection Bureau, to prevent meaningful regulation of the derivatives markets, to allow the banks to regulate themselves and set their own standards for risk, and to reduce the effectiveness of outside oversight by the SEC, CFTC, and other regulators.   What they are demanding is not Free Market Capitalism — it is unfettered unrestrained unregulated  Financialism.

Free Market Capitalism invests in infrastructure.  Free Market Capitalism requires a productive, healthy, educated work force.  Free Market Capitalism demands maintenance, innovation, and expansion of its manufacturing base.  Free Market Capitalism needs the savings of the work force.  Financialism yawns and asks the adjacent trading desk, “Brother can you spare me a CDS?”

“Brother Can You Spare A Dime?” Songs of the Depression, CUNY.

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