Ever wonder who’s responsible for the widening wealth gap in America? Or how the middle class across the country got hollowed out in a generation?
It’s not a mystery, though what’s happened has been shrouded in false narratives and fake news.
The truth’s in front of us. We’re living it in real-time. It’s just never discussed openly… for a reason. The people who are behind this growing catastrophe have rigged the system into believing this is normal.
Who to Blame for the Disappearing Middle Class
Republicans aren’t to blame. Their old-school platform of a smaller federal government, fiscal conservancy, more power to the states, and belief that a lightly regulated path to working hard and standing on your own two feet is what made America the global bastion of entrepreneurship and helped create a middle class is laudable and fair.
Democrats aren’t to blame. Their old-school platform of a larger, more interventionist federal government spending on social programs supporting and safeguarding workers, all kinds of civil rights, protections for the environment, and their belief that government should stand behind those not able to stand on their own two feet or have been trampled by runaway businesses helped create a middle class is equally laudable and fair.
The two parties, with their vision and flaws balanced by democracy, made America great.
What happened is greedy, neo-con, profiteering Republican crony capitalists hijacked the party, while greedy, limousine liberal, profiteering Democrat crony capitalists hijacked their party. Together, as a new class of elites joined the Masters of the Universe, they began manipulating state apparatuses and banking for fun and profit… A lot of profits.
The crony capitalists’ principal enrichment tools are “financialization” and its manservant, “globalization.”
Financialization is the retooling of the economy’s production and distribution assets, consisting of made-in-America goods and services, into credit-driven banking and financial services products.
At its core, financialization is the transfer of low risk, low profit debt into high risk, high profit products.
The net result of the mass commodification of debt-based financial instruments and leveraged debt (grossly under-collateralized by low risk debt) is rampant speculation. This heavy betting, however, isn’t undertaken just for the sake of pyramiding risks for speculative gains. These so-called “products” are now integral and necessary investment tools because traditional, safe investments don’t yield adequate returns in the world of financialization.
In 1980, according to the U.S. Bureau of Economic Analysis, financial services contributed 4.9% to the country’s GDP. At its peak in 2006, that contribution had almost doubled to 8.3%.
More to the point, in terms of profitability, James Kwak, law professor at the University of Connecticut calculated, in 1980 the financial industry’s profits as a share of total U.S. business profits was 7.5%. That share of all business profits in corporate America jumped to more than 41% by the mid-2000s.
U.S. GDP in 2016 was $18.56 trillion, according to the BEA. In full view of financial services share of GDP (which is rising again) and its share of corporate profits (also on the march to new highs), it’s impossible not to see the financialization of the U.S. economy.
How Financialization Snaked Its Way Into Our Government
The road to financialization began with the overturning of longstanding public and economic protections starting with the Depository Institutions Deregulation and Monetary Control Act of 1980, a Trojan Horse that let banks establish holding companies and gave the Fed more power over more banks.
That major deregulatory action was followed quickly by the Garn-St Germain Depository Institutions Act of 1982, which leveled the playing field for banks and their holding companies experiencing competitive disintermediation and decreasing profitability.
Ultimately, a series of subsequent rules- and regulations-trimming by Congressional cronies crescendoed with the Gramm-Leach Bliley Act of 1999, whose main function was the total repeal of the Depression-era Glass-Steagall Act that for decades separated insured, deposit-taking commercial banks from swashbuckling investment banks.
That’s how elitist Democrats and Republicans paved a super-highway for the financialization of the American economy and their enrichment from the country’s transformation.
Who were the Republicans and Democrats behind the wholesale transformation of America, and where are they now? You’d be shocked at how many of them you know as Senators, House members, cabinet Secretaries, principal regulators… Supposed stalwarts of American prosperity, who’ve become filthy rich at the expense of the middle class, on whose backs and from whose labor and savings they’ve enriched themselves personally and their reelection war chests. I’ve written thousands of pages here in Insights and Indictments naming names and calling these sellouts what they really are: crony capitalist pigs.
The proof is in the pudding. Actually, make that pooling.
Without financialization, we never would have had the subprime mortgage crisis and the market and financial system crashes.
Home mortgages used to be made “locally” by bankers, thrifts, and credit unions that knew their communities, knew the value of properties and neighborhood borrowers. Mortgage loans mostly stayed on the books of lending institutions until maturity or until properties were sold.
Financialization, with its cheap come-on capital, its pooling techniques, its structuring, its tranches, derivatives and synthetic derivatives of derivatives, turned a utility service into a speculative pyramid of leveraged loans that looked and acted more like a Charles Ponzi scheme than the sophisticated, high-yielding, safe (a lot of them packaged with government approval and guarantees) financial instruments they were made out to be by rating agency co-conspirators.
We know how that ended.
The Other Victims of Financialization
The other prime example of the financialization of America is the pooling of student loan debt.
As if leveraging-up the American dream of homeownership wasn’t slippery enough, leveraging-up students and adults stepping up the ladder of a higher education in pursuit of better wages and career opportunities is an even more egregious financialization scheme with the same profit motive.
What happened to professors, administrators, state schools’ and private schools’ goals of helping Americans get a higher education for the fair wages they earned and the balanced budgets they hoped to achieve?
They got greedy. They’re all in the big for-profit game now, thanks to financialization.
Hopeful students are suckered into cheap loans which are, of course, pooled, leveraged, sliced, diced, and sold to investors. The cash those investors fork over can be used to make more loans, to pyramid (or Ponzi, if you choose) students hopes and dreams that a higher education means a higher standard of living.
And if those loans are in arrears, in default, and don’t get paid back, investors don’t worry.
The government, thanks to crony capitalist Congressmen and women, have fixed that profit-leaking hole. Making student debtors “low risk” by having the state guarantee payment of interest and principal to investors – while extracting more payment from grossly indebted students (most of whom never graduate) no matter the cost or the poverty level of those beleaguered, unemployed, underemployed, and generally struggling indebted borrowers – means that more loans can be “sold” like dream-catchers to the uninitiated who have no idea about the trap they’re being lured into.
And as for the neo-liberal educators and liberal schools who want more kids to get a better education, they’re making hundreds of thousands of dollars in salaries and tens of millions of profits every year.
That’s financialization at work.
Then there’s financialization’s manservant, globalization. As if domestic financialization isn’t enough, the world has become a spoke in the profiteers’ wheel of fortune.
Next week I’ll tell you the truth about globalization, and how it is essentially the slave of financialization.
Then I’ll tell you how to play the game while we work together to destroy it.