By Terry Morrone
We’re in a class war and we’re losing. The rich are getting richer and everyone else is getting poorer. We’re abusing the planet through global warming and pollution. Unless we make radical changes, we’re heading for poverty, starvation and constant war. The whole world is in crisis, not just the United States. The amoral behavior of corporations and their allies in government are causing most of our problems. They don’t care how many people they kill in their quest for money and power. Imagine a world without laws. That’s what exists now for the rich and powerful. But our identification with the rich and the respect we give to anyone with money, no matter how they got it, is also a problem.
In this report I’m going to briefly describe the destructive behavior of our major corporations and banks. Then I’m going to suggest a list of remedies that I and others advocate. There seems to be a consensus on what has to be done among a group of progressive economists I’m familiar with.
Brooklyn, a borough in New York City, is one of the most liberal communities in the nation. Last year I attended a Union for Radical Political Economics (URPE) conference there. I also attend the Left Forum every year, which now meets at Pace College next to the Brooklyn Bridge. I also happen to come from Brooklyn. So I’ll use the term “Brooklyn Consensus” in contrast to the “Washington Consensus” which has an orientation towards neoliberal policies.
One of the causes for our downward spiral is the financial system, including the stock market, banks and the Federal Reserve. I have no training in finance or economics, so here’s another report written by a dummy for other dummies.
I’ll try to show that we need a new economic system and a new set of ethics. We should value people for their friendship, uniqueness and contributions to society, not for the amount of money they steal. I’ll start with the stock market.
The Stock Market
I’ve read that the stock market is a Ponzi scheme. (1) Corporations have 2 classes of products. One class includes tangible things, like toasters or solar panels. The other is stock. Stock is a form of money. To issue it, all you need is good PR, though having a good product will help. Financial TV shows are like the motion picture Academy Awards. They publicize and give credibility to the stock market. Corporations convince people that their stock price is going to go up. Then they can sell all that the market will bear. They need not issue dividends unless their PR is deficient. The average dividend rate is only 1.5 percent, (2) so the average investor gets less return on his money than if he had bought treasury securities, except for the fact that others are often willing to buy the stock for more than he paid for it.
Global Crossing is an example of a corporation that was more hype than substance. Its chairman, Gary Winneck, was a very good fund raiser and publicist. In the dot com bubble, his vision of connecting the world by fiber optic cable attracted many investors and the support of Wall Street firms. According to Nomi Prins, “He manipulated the financial and political sectors than any robber baron….” His company went bankrupt, but he collected 734 million dollars in the process while the public lost billions. (3)
Trading on inside information siphons money out of the stock market. Whether the trading is electronic or done the old fashioned way, the people who run the market have inside information. They know, for example, when many buy orders are coming in for a particular stock. So they can invest some of their own money before the market reacts and the stock price increases. Or the market maker (a broker who keeps an inventory of a stock on hand so he can facilitate buy and sell orders quickly) can use his advance knowledge of a big buy order and manipulate the price of the stock up to the maximum amount the big buyer is willing to pay. Banks also have inside information, as they know about capital flows in or out of the market. The people who run mutual funds can use the information on how the stocks in the fund are performing on a given day, and buy the fund using yesterday’s closing price if the fund value is going up. They then sell the fund the next day. It’s called “late trading” and it’s now illegal, but there are lots of ways to get around it, for example, by buying the fund and falsifying the date. Gary Weiss, in his book “Wall Street Versus America” (4) details the ways traders siphon off money from the stock market, and the lack of serious regulation from the Securities and Exchange Commission (SEC).
Before 9/11/2001, I used to dabble in the stock market. After 9/11 I became an activist and didn’t have time. I spent many hours with the Value Line and Morningstar in my local library, reading up on stocks and mutual funds. I bought stocks that looked good in industries that were expanding. Then all too often I would find that I was the victim of stock fraud. A stock would go down in price and I would get a letter informing me I was eligible to be part of a class action law suit which was trying to recover money illegally taken out of the corporation. In the one case the president of the company had ran off with the company treasury. In another case, reported earnings had turned out to be fictional.
Stock prices are justified by earnings and growth. That is, corporations are continually expanding and stock prices reflect the growth potential, but we’re close to the point where growth must stop because the planet can’t take it. Lots of times corporations falsify their earnings statements using creative accounting. So it’s hard to tell how well they are really doing.
Arthur Levitt, chairman of the Securities and Exchange Commission under Clinton tried to institute a requirement that accounting firms cannot audit and consult with a corporation at the same time. He didn’t succeed. The accounting firms said no. (5)
Arthur Anderson was both auditing and consulting for Enron at the same time. Enron insisted that a troublesome auditor be taken off their account. Arthur Anderson complied. Enron’s earnings were illegally overstated for years and it reported favorable earnings just months before it went bankrupt. Enron also used its financial clout with Wall Street firms to get favorable investment ratings. Robert Fastow, Enron’s chief financial officer, got a stock analyst fired for not giving Enron a buy rating. (6) A brokerage firm whose analysts give a big corporation an unfavorable rating is likely to lose underwriting or consulting contracts or never be considered for one in the future.
Enron set up around 3000 Special Purpose Entities (SPE’s) to mask it true earnings and liabilities. An SPE is supposed to have some independence from the parent corporation, with outside investors putting in at least 3 percent of its capital. Enron’s Fastow was in fact in complete control of the SPE’s and the outside investments were in many cases really loans to Enron that were repaid later. The SPE’s hedged against a reduction in Enron’s stock price, for example, and the hedge contracts were illegally valued as an asset by Enron. In effect Enron was hedging itself.
Enron may be an extreme case, but many corporations bend the accounting rules in a similar fashion. For example, SPE’s are commonly used to get non profitable assets off balance sheets or to park income producing assets in tax havens. Like many other corporations, Enron lavished money on politicians, including both George Bush 1 and 2, to get energy trading regulations relaxed, resulting in a run up in prices. Enron in collusion with other energy companies were responsible for the power crisis in California which produced huge profits for the energy traders. Power plants were shut down to produce power shortages and blackouts. Instead of going from power plant to consumer, power was sold and resold to drive up prices.
Short selling is supposed to be terrible, but this is not often the case. When you buy a stock, the stock is held by your broker and he can lend the stock to someone for a fee. After a time period, the stock has to be returned. Suppose a corporation has a million shares of stock outstanding and someone borrows half a million shares which he dumps onto the market. The price of the stock will go down. Many people have “stock loss” orders in place which trigger a sell order when a stock drops below a certain point. When the stock has declined in value, the short seller purchases shares and returns them. A healthy company need not fear short sellers, but one that depends on stock as its chief product is likely to fold. Short sellers look for overvalued stocks, and by driving weak and fraudulent companies out of business, they prevent potential buyers from being taken in.
But you can have too much of a good thing. Some short sellers sell stocks they haven’t borrowed. It’s called naked short selling. Some short sellers effectively counterfeit stock which is similar to counterfeiting money. Trillions of dollars may have been lost and thousands of companies “shorted out of existence” in the six year period ending in 2004. (7).
We invest our life savings in stock, and the corporations use some of the money to bribe legislators and government officials to transfer wealth away from us to the wealthy. Our investments hopefully help create useful products, but often all corporations do is shuffle money around. Fifty percent of corporate profits come from financial institutions.
A financial industry is needed. Suppose a corporation starts out with a good idea, but doesn’t have enough money to go into business. It gets a brokerage firm to create stock and offer it to the public. (It’s called underwriting.) Money is raised, a product is produced, workers are employed, and the wealth of country is increased. The stock buyers, the corporation and the stock broker all make money which they have earned honestly. That’s the way it’s supposed to work. Stock is a means of raising the large amount of capital needed for huge projects such as oil pipelines, and venture capitalists provide money for start ups. If a municipality needs money for putting in a sewer system, for example, it sells bonds with the aid of a financial institution.
At any rate, corporations take advantage of the lack of law enforcement and lax regulations, to use the stock market to enrich themselves at the expense of the public. Furthermore, the finance
industry has the power to sabotage the economy. As we shall see in the section on derivatives, Wall Street has been turned into a gambling casino that endangers all. I’ll review a few proposals aimed at changing this abysmal situation near the end of this report.
The Real Estate Scam
The real estate scam involved several players. First there were the mortgage companies, such as Countrywide and Ameriquest, who, using sales teams that included many with criminal records, sold the fraudulent mortgages to unsuspecting home owners and aspiring home owners. Then there were the Wall Street investment banks that bundled the mortgages into securities. Next the rating agencies rated the securities AAA. Eventually most of these were classified as junk bonds. Finally, the insurance companies, notably AIG, through credit default swaps, pretended to insure the securities against loss.
Michael W. Hudson’s book, “The Monster” (8) is full of examples of the victims of the scam. Here’s a composite example. An old couple has large credit card debts because of medical expenses. They hear in a TV ad that they can get their monthly payments reduced, and have only one bill to pay each month by getting a home improvement loan. They go to a loan company where a nice young man tells them he can help them out. He makes them feel cared for by giving them coffee and asking them about their children. They agree on a 30 year fixed rate mortgage, with a closing cost of 10,000 dollars and a fixed interest rate of 8.5 percent. The couple will have enough money to pay off their old mortgage and their medical bills. Their monthly payment will be less than what they’re paying on the credit cards. It seems too good to be true, and it is. Their loan application was falsified. Their ages were reduced by 20 years, their house generously appraised for twice as much as it was worth. When they go to closing they are pushed to sign a bunch of documents they don’t have time to read. Later they find that they agreed on a sub-prime loan with a closing cost of 20,000 dollars and an interest rate of 11.5 percent which increased to 18.5 percent in 2 years. After the interest rate increase, they can’t keep up the payments and they lose their home.
The mortgage company keeps the loan on the books for 3 days and then they sell it to Lehman Brothers where it is quickly bundled in a security and sold. The mortgage salesman has a few qualms of conscience, but rationalizes: He has to feed his family, and if he didn’t do it somebody else would. He has to sell a quota of mortgages for the month and his phone calls are monitored by his boss. If he strays from the company line and fails to mislead his clients, he will lose his job. The investment bankers pat themselves on the back for being Wall Street tycoons and get large bonuses at the end of the year for selling overvalued securities all over the world.
First time home buyers were also conned into getting sub-prime mortgages with excessive fees and teaser rates that ballooned into rates they couldn’t afford after a few years. Deceptive clauses in the agreements prevented them from refinancing without paying more excessive fees.
Sub-prime loans have put a few people into homes that they couldn’t otherwise afford, but twice as many people lost the homes they already owned. (9) In the United States in the third quarter of 2009, 5.3 percent of homeowners are more 90 days or more behind on their mortgage payments. Roughly 3 percent go into foreclosure each year. In areas where the predatory lenders are most active, often minority neighborhoods, foreclosure rates are as high as 50 percent. (10)
Banks and Money Creation
Most of the following can be found in Ellen Brown’s Book, “Web of Debt.” (7).
When I went to elementary school, I recall one of my teachers telling me that banks made money by lending out money that was deposited at an interest rate higher than the rate they gave to depositors. My teacher was passing on a commonly held misconception. Banks actually have the awesome power to create money. Here’s how it works. Suppose a bank has a certain amount of assets, say 1,000 dollars. That gives them the right to lend out about 12,000 dollars. The borrower is given the right to write a check for that amount or simply a check. He is given “electronic” money which he has to pay interest on. The process is called fractional reserve banking.
The bank’s reserves need not come from deposits. A bank can borrow the reserves from the Federal Reserve which has the power to create money out of nothing. The bank can also borrow the reserves from other banks that have excess reserves. The money is lent at the federal funds rate which is practically zero at the moment. The Federal Reserve is a corporation that is owned by several banks, but whose Chairman and Board of Governors are appointed by the President and confirmed by the Senate.
According to banking rules, if a borrower does not pay back his loan, the bank is responsible for it. A bank is declared “insolvent” and sometimes has to close down if the value of its outstanding loans and other assets is less than the value of its liabilities (deposits, for example). A bank can be shut down by the agency (state or federal) that granted it its charter. Still, it is hard to imagine a bank dumb enough to become insolvent, but many manage to do so.
The Fed sets the federal interest funds rate by buying or selling government securities. When it buys securities it increases the amount of money in circulation, lowering the interest rate. When the Fed sells securities it decreases the amount of money in circulation, increasing the interest rate. The present (spring 2011) funds rate is between 0 and .25 per cent. Before the financial crisis in 2007 it was 5.25 percent. Banks can get money for practically nothing and lend it out to holders of credit cards for 25 percent or more.
Banks usually lend out as much as they possibly can (though not lately), because the more they lend the more interest they can collect. If there’s a run on the bank, that is, if enough depositors try to take out their money in a short interval of time, the Federal Reserve comes to the banks rescue. The bank can borrow money at the “Discount Window,” so called because the interest due is deducted in advance.
There are 2 types of banks, investment and commercial. Commercial banks are the everyday banks we’re familiar with, providing checking and savings accounts, home mortgages and other loans. Investment banks deal in mergers and acquisitions, underwriting stocks and bonds, producing and selling derivatives, etc. During the financial crisis, for the first time, investment banks were allowed to borrow at the discount window. This is a huge taxpayer giveaway, given that the banks can get the money at practically no cost. The banks can also be as reckless as they want without fear other banks will refuse to lend them money.
When the U.S. has to borrow money, it issues treasury bonds and treasury bills. They are sold all over the world and the government pays out about 400 billion dollars each year in interest to the buyers. We owe about 14.3 trillion dollars, almost as much as our gross domestic product. When the government can’t sell all the bonds it has issued, the Federal Reserve buys the bonds, creating the money out of nothing. The Fed collects interest on the bonds, but it is supposed to give the interest back at the end of the year. However, the banks that own the Fed can use the bonds as reserves, and make loans based on their reserves. Furthermore, the Fed has bought a lot of toxic assets from banks, which if sold at a loss can now be used to cancel out interest owed to the treasury. (11) It’s another way we subsidize the rich.
While most of us have to work for a living, banks and corporations can create their own money. They use the public’s money to bribe government officials and legislators to make it possible for them to make even more money, and to subvert public opinion through their control of the media. Corporations pay very little in taxes compared to the working man. Corporate officials almost never go to jail for breaking a labor law or an environmental law. Mostly, they pay a small fine, a “slap on the wrist.” They are almost always above the law. There are a few exceptions in extreme cases where the corporate criminal gets a lot of publicity.
The Great Bank Scam
When the real estate bubble broke in 2007, big investment banks such as Lehman Brothers, Bear Sterns and Goldman Sacks were caught holding many of their own mortgage backed securities. They knew they were overvalued, but they had kept some of the higher quality ones and insured those with AIG. But when the bubble broke and Lehman brothers went into bankruptcy, AIG could not pay up. In steps the federal government and bails out AIG, Goldman Sacks and the Bank of America etc. The amount spent on the bailout could be as high as 23.7 trillion dollars. (12) The corporations in on the real estate scam were lavishly rewarded for their crimes. Instead of going to jail for fraud, bank executives got big bonuses. Meanwhile the victims of the scam got nothing. In the 1980’s in the Savings and Loan Crisis, about a thousand bankers were prosecuted for bank fraud and 800 went to jail. There was much more fraud in the current crisis, but not a single banker has gone to jail. The only people getting prosecuted are the small time scam artists. The higher ups are “too big to jail.” (13)
Besides helping the banks by bailing out AIG, the Fed bought about 14 trillion in toxic assets from the banks at secret prices, grossly overpaying for them. The fed also made loans to banks which used the toxic assets as collateral, but the Fed ended up owning the toxic assets when the banks failed to repay the loans. So now the Fed is stuck with trillions in toxic assets and the banks have trillions in cash. Corporations also have trillions in cash. The banks were bailed out so they could start to lend out the money and boost the economy, but they will not lend out the money in the United States. Instead they have used it to buy back stock, to buy treasury securities, to make loans in foreign countries, and to buy out smaller banks, giving themselves a near monopoly. Banks can borrow money with a near zero percent interest rate and buy treasury bonds paying, as of 4/21/11, 2.25 percent for 5 year and 3.625 percent for 10 year treasury bonds. The Fed is also helping the banks make money on their excess cash by paying them interest if it is deposited at the Federal Reserve. Banks and corporations won’t invest the money in the US economy because of its dismal prospects, given the austerity measures of federal, state and local governments. (11)
The Offshore Scam
Tax havens are places where you can store or invest your money in perfect secrecy and avoid paying taxes on any capital gains or interest. A few examples are the Cayman Islands, Switzerland, and Bermuda. The biggest tax haven of all is the United States and the next biggest is Great Britain. Lots of money made in the illegal drug trade ends up in tax havens. In the United States, Delaware is a big tax haven. I consider Delaware a rogue state. Most US corporations are registered in Delaware because state laws give the shareholders very few rights and the corporate state income tax is zero. Delaware is also the headquarters of credit card companies, because the allowable interest rate there is very high, 30 percent.
The super rich routinely evade paying taxes. There are many ways to park your money in a tax haven. Some are very complicated, involving trusts, making it hard to figure out who controls the money. I’ve heard of only one case where one of the super rich was convicted of tax evasion. Leona Helmsley made the mistake of cheating a group of contractors she was pressuring to misrepresent remolding costs for her estate as business expenses. They turned over evidence of her cheating to the New York Post. She’s the exception that proves a rule. Without the publicity, she would have gotten away with it. Her maid testified that Helmsley once said, “We don’t pay taxes. Only the little people pay taxes….”
John Christensen, a whistle blower who was once a high official in the tax haven of Jersey, an island in the English Channel, estimated that 11.5 trillion dollars of the wealth of the super rich resides in tax havens. (14) Mark Zepezauer claimed in 2004 that 3 trillion in US assets is parked in overseas accounts with 800 million in the Cayman Islands alone. (15)
Corporations make use of tax havens to avoid taxes also. Christensen gives an example of how it works. (16) An American corporation ships bananas from Honduras to Great Britain. It pays 13 and one half pence to produce a pound of bananas in Honduras. But before the bananas reach their destination, subsidiaries of the company perform services and make profits in tax havens where the tax rate is zero or very low. First a subsidiary in the Cayman Islands raises the price 8 pence for use their purchasing network. Next a subsidiary in Luxemburg charges 8 pence for financial services. Then 4 pence are added to the cost in Ireland for use of a brand name. Then another 4 pence are added in the Isle of Man for insurance. Then 6 pence is added in Jersey for management services. Finally, 17 pence is charged in Bermuda for use of the distribution network. In Britain the company claims that the cost of the bananas is 60 and one half pence. If it sells the bananas for 65 pence it can claim it only made a 4.5 pence profit. But in reality nothing happened in each of these tax havens. The process is called transfer pricing.
Corporations that manufacture products can sell goods from one subsidiary to another. The prices are adjusted so that the profits are made in low tax rate countries. Zepezauer estimated in 2004 that 137.2 billion in taxes is avoided annually by US based corporations. (17) Two thirds of US Corporations paid no federal taxes from 1998 to 2005 according to General Accounting Office Study (18)
Here are a few examples of tax evaders. General Electric has not paid US taxes for years. In 2010 it reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Yet it claimed that it was entitled to a 3.2 billion dollar tax refund. (19) Google pays only 2.4 percent tax on overseas earnings by moving most of its foreign profits through Ireland and the Netherlands to Bermuda. It evades over a billion a year in taxes.(20) Goldman Sachs paid only 14 million in taxes in 2008, although it made a profit of 2.1 billion dollars and paid out 10 billion in compensation and bonuses. Its effective tax rate was .7 percent. (21)
Corrupt dictators, often supported by the United States, can easily deposit money looted from their countries into the offshore banking system. Most foreign aid to third world countries ends up in offshore banks. Debt enslavement is abetted by the offshore banking system. Corrupt governments borrow money from the IMF which ends up being used in useless mega projects or being siphoned off to the offshore system. The people have to pay the loans back with interest, seemingly forever.
Trafficking in drugs, weapons and people constitute a large part of the “criminal economy.” Most of the profits, of about 500 billion dollars a year, end up in the offshore system including a large chunk in the United States. Drug smuggling generates 400 billion in profits with only 1.4 billion going to the drug growing countries. The total “gross criminal product” which includes counterfeiting, computer crime and arms smuggling may be as high as 1.5 trillion dollars a year. (22)
The Military Spending Scam
Autocratic governments need war or the threat of war to justify their rule, and to stifle dissent and progressive movements. The Cold War was invented by the military industrial complex as was the War on Terror. Moslems had nothing to do with the collapse of the twin towers as anyone can verify by reading up on the subject. (23)
A measure of democracy in a country is the degree to which the civilian government controls the military. The day before 9/11 then Secretary Rumsfeld announced that 2.3 trillion dollars could not be accounted for in the military budget. The Pentagon cannot account for 25 percent of what it spends according to a CBS news report. (24)The military spends trillions free of congressional oversight, besides trafficking in illegal drugs. (25) To make any progress in this country, we have to do something about the trillion a year lavished on the military. We could easily change to an economy based on renewable energy by spending less than we now spend on foreign conquests. (26) Privatization and fraudulent wasteful contracts have put mega millions in the hands of corrupt corporations. Again, this money is used to subvert the democratic process.
The Great Media Scam
The US media is controlled by a few large corporations closely allied with the military industrial complex, including the CIA. Many Americans believe that the US is in Afghanistan and Iraq to fight terrorism and to spread the blessings of liberty, that free trade is bringing prosperity to the world, that Muslims are the main source of terrorism, global warming is a hoax, unions are bad, socialism is a dirty word, capitalism is good, privatization is good, nuclear power is good, the US is a free and open altruistic society, that the press is free, that happiness comes from owning things like homes and cars, that religion is good, that personal responsibility and hard work will overcome all obstacles, that the American way of life is the ultimate good, and that science and human creativity will bring perpetual progress. According to Chris Hedges we’ve been taken in by images and appeals to emotion. If the same lies are repeated over and over again from a variety of sources, it’s very hard to resist believing in them. If you believe most of the above, you’re what I call a MBA, a “Mostly Brainwashed American.” Michael Betancourt calls our economic system “Agnotolgic Capitalism,” a system based “on the production and maintenance of ignorance which includes a process of misinformation designed to obfuscate, confuse and confound.” (27)
I find that the internet is a good source of news. There’s a lot of nonsense on the internet including stealth government propaganda, but at least one can find good material if you look hard enough. For example, many interviews and talks of Chris Hedges and Noam Chomsky are easily available.
Internet neutrality is under is attack. The establishment can’t stand the thought of free speech and they’re trying to give internet carriers the right to censure content.
The first large government propaganda campaign came in the World War I. The Committee on Public Information was formed by the Wilson administration to get the public to support the war and vilify the Germans. In truth at the time, Germany, with its Social Security and Socialized Medicine was at least as democratic as Great Britain.
The current propaganda campaign aims at demonizing Muslims as a terrorist threat, in order to justify our conquest of Muslim lands and repression of civil liberties in the US. (28)
The Menace of Derivatives
A derivative is a contract that derives its value from an asset or some number like an interest rate. A derivative can also be a bet on something that could be another derivative and it can be turned into a security that is bought and sold. Futures, options, and swaps are common derivative securities.
Here’s an example of a future: A farmer pays someone for the right to sell him an amount of wheat at 100 dollars a bushel in the next year. The contract can be sold to someone else if the farmer so desires. Derivatives sound innocent enough when they’re a kind of insurance. For example, portfolio insurance is a type of derivative. In the run up to the stock market crash in 1987, many individuals and institutional investors funds bought portfolio insurance. This encouraged much speculation and a stock bubble. During the housing bubble, investment banks bought credit default swaps from AIG. They paid AIG to insure them against the danger to a loss in value of mortgage backed securities should mortgage holders default. AIG was so in love with these securities that it used the fees it collected from lending out stocks to short sellers to invest in more mortgaged backed securities. (29) When the housing bubble broke and AIG couldn’t pay up the many billions of dollars owed, and the taxpayers ended up with the bill. AIG executives were rewarded for their bad business decisions with large tax payer financed bonuses. (30)
Again, the so called insurance inspired speculation. The institutions involved were deemed too big to fail, and ended up being rewarded with billions of profits for their fraud and incompetence. Insurance works if the danger being insured against is limited. For example, fire insurance on a home is practical because the probability that all the homes in a country will burn down at the same time is negligible. Derivative insurance, when everyone insures against the same single thing happening, cannot work.
Derivatives, such as futures, can be traded and can be thought of as another form of money created by a non-governmental body. If many derivatives are in circulation they can drive up prices. Derivative speculation and excessive trading led to the run up in gasoline and food prices in 2008. According to Mike Taibbi, “By 2008, 80 percent of the activity on commodity exchanges was speculative.” Taibbi quoted a knowledgeable congressional staffer. Such speculation wasn’t allowed before the deregulation mania hit Washington. As Taibbi explained, commodity trading was limited in the Roosevelt administration by the 1936 Commodities Exchange Law, which prevented speculators from cornering a market to drive up prices. (31) The speculators are parasites sucking wealth out of the real economy.
Many municipalities in attempts to cut their bond interests costs entered into complicated derivative deals, paying huge fees to Wall Street banks. The deals involved such things as floaters and inverse floaters, etc. Some municipalities were persuaded to issue variable rate securities with interest rates set by periodic auctions, and to guard themselves against interest rate rises with swap deals. Every period (usually 7, 28, or 35 days) the bonds were auctioned off. Bidders (including present holders of the bonds) would offer to buy a certain number of shares at a certain interest rate. If not enough bidders come forward the auction is said to have failed, and the municipality would have to pay a high penalty interest rate of sometimes 20 percent. Most auctions failed in the financial crisis of 2008 since the bonds were often insured by companies such as AIG whose credit rating fell, making the bonds less attractive.
To get out of the deals the municipalities had to pay huge fees to Wall Street firms such as J.P.Morgan. Many claim that they weren’t told about the risks they were taking. There have been many law suits. (32) In one case JP Morgan Chase bribed a Jefferson County, Alabama official to get the deal and had to pay over 700 million dollars in penalties to the SEC. (33)
The amount of derivative bets today is around 600 trillion dollars, 10 times higher than the world yearly gross domestic product, leaving us in danger for another financial disaster. (34) The actual amount of money changing hands, however, is much less. To understand this, consider an interest rate swap. One party pays the other a stream of payments that doesn’t vary with time. The other’s payments are proportional to the current interest rate. When the contract goes into effect, the payments balance and no money changes hand. But if something happens that upsets the status quo, the amount of money owed could increase rapidly. A pernicious feedback loop or vicious cycle may start, leading to financial ruin of half of those holding derivative contracts.
Many municipalities and corporations are now in swap agreements with banks that will pay them money if interest rates go up. Conversely, if interest rates go down, the banks will be paid. According to Fred Sheehan, “During the first 6 months of 2009, the volume of contracts offering protection against rising yields of Treasury bonds with maturities of 5 years or longer rose from 109 trillion to 140 trillion. If rates rise, banks may once again default on their commitments.” (35)
The banks can’t seem to turn down any business no matter how risky it is. I guess they figure they can always get bailed out. If interest rates start to go up, they plan to do dynamic hedging. (36) That is, they will try to buy derivatives that profit when rates go up or they could try to short bonds and dump them on the market. This will make rates go up some more. The situation could become unstable if there’s an unexpected jump in rates.
The banks are betting that the bank friendly Federal Reserve will keep rates low to avoid another banking crisis, but with so many trillions of derivative bets there might be factors in place that will prevent the Fed from dumping money onto the market to keep rates low. The banks are raking in huge profits with the almost free money they can get from the Fed and are now sitting on hoards of cash. This money is leading to the explosion in interest derivatives and reckless risk taking. The Fed seems to be dedicated to preserving the profits of big banks, no matter what it does to the economy. The derivatives market is a giant casino, but the odds are stacked against the public. We can’t win, but we have to pay for the losses of the loser.
The Medical Industry Scam
Much of our health care spending is wasted in administration and advertising. A single payer universal system would be much cheaper and better. The media publishes any story at all that finds a problem with a vitamin, but ignores the huge death toll caused by prescription drugs. Herbs are never tested by the FDA, and the pharmaceutical industry has no interest testing them because they can’t be patented. Clinical trials of prescription drugs are often fraudulent. Drug prices are ridiculously high because the government makes no effort to limit them. Panels that approve drugs and vaccines are riddled with conflicts of interest. The whole system is hopelessly corrupt and inefficient. (37)
Obama’s health care plan is a subsidy to the insurance industry. It has no provisions to contain costs and will be too expensive for many to afford. It’s no accident that most of it will not go into effect until after the 2012 election.
The Voting Machine Scam
Voting machines can produce any result the manufacturer of the machine wants. Bush won in the 2000 and 2004 elections by voting machine fraud. While optical scanners may be a little harder to hack than the DRE (direct recording electronic) machines, they can also be manipulated. We should use paper ballots, as several European countries do. It would be cheaper and more accurate. There’s plenty of evidence that election fraud is commonplace and it always favors republicans because they control the machines. In the last senatorial election in Massachusetts that started the republican resurgence, in election districts which used paper ballots, the Democrat won. In districts with machines, the Republican won. If fixing the machines isn’t enough, the vote count can be changed when it is electronically transmitted.
The latest election in Waukesha County, Wisconsin looks fraudulent. This election was supposed to be a referendum on the Republican’s attack on unions. The mass media has no interest at all in reporting on election fraud. (38, 39)
The Gathering Storm
Because of declining tax revenues, tax breaks for the rich, tax evasion by the rich, huge military expenditures, rising oil prices, increased costs due to extreme weather events caused by global warming, and huge bank bailouts, governments on all levels in the United States are in financial trouble. To cut deficits and prevent inflation they are pushing austerity programs that can only make matters worse. Cutting back on the military and subsidies to the rich are not on the table. A depression is likely. When third world countries go into debt, they are forced to adopt “structural adjustment” programs which cut budgets at the expense of all but the rich. This is what is happening here.
The dollar’s days as the world reserve currency are numbered. Economists tell us that at present there is no currency that can take its place, but we are abusing our unique ability to create money at will. The countries in the world, such as China, that are buying US Treasury securities are in effect paying for our military expansion. As the US economy becomes a smaller and smaller fraction of the world economy, a change from the dollar is likely. When there’s a will there’s a way, and our imperialism is creating the will. We are one of the most hated countries in the world. (40) When the change occurs, prices in this country will go up, and what’s left of our standard of living will decline.
If there are large scale protests, the federal government has plans to lock up millions of people in detention camps. According to Congressman Henry Waxman and former congressman Dan Hamberg, the federal government has contracted to build detention camps all over the country and to build thousands of railcars, some equipped with shackles, to transport detainees. (41, 42)
The Brooklyn Consensus
The point I’ve been trying to make is that the present political system is so corrupt that it cannot make the changes needed for civilization, as we know it, to survive. There is no hope for democracy in this country as long as corporations and the military have so much power. I heard this first in a talk by economist Richard Wolff at the Left Forum a few years ago. Wolff said that regulations would help, but if enacted corporations would get to work immediately to subvert them. We need revolutionary changes. Voting for a Democrat who promises change, as we found out with Obama, is not going to help. Economic misery and hunger allow people to see things clearer and to rid themselves of many illusions. But as Chris Hedges has pointed out, distress can be channeled into fascism as well as democracy.
Corporations use their power to get the government to interfere with free enterprise. For example, the drug companies used their influence to get the FDA to enact regulations that make it almost impossible for vitamin manufactures to make generic drugs. (43)The recent so called Food Safety Law was enacted to make it hard for small farmers to compete with the large food conglomerates. (44) The fossil fuel industry gets billions of government subsidies every year. (45) It’s time for the government to regulate the market for the benefit of all, not just the big corporations.
Here are some observations and suggestions that I feel have wide support among progressives in this country. I’ve also thrown in a few of my own ideas. I’ve tried to keep some of Capitalism’s good features, like the markets for goods and stocks, but at the same time undermine the power of the rich and powerful. Essential changes cannot be implemented without making mistakes. We have to be willing to experiment. Suggestions for improving this list, or references to other reports would be greatly appreciated.
The Brooklyn Consenus, First Draft
1. We need massive protests like the ones that occurred in Wisconsin and in several European countries. Without them, elections will be rigged and legislators will be bribed. It will be business as usual. Civil disobedience may also be needed.
2. We need a third party that has great grass root support.
3. The banking system, including the Federal Reserve, should be nationalized. Instead of turning over trillions of dollars to banks that will not lend money to help economic recovery, the government should lend out the money itself. We can start with state banks. North Dakota already has a state bank and it’s the only state that’s not in financial trouble. We have to stop allowing banks to create money and charge interest on it. The interest is a subsidy to the rich. The government should create the money instead. Ellen Brown’s in her book “Web of Debt” points that before the American Revolution we had state banks that issued paper money, resulting in great prosperity. (46)
4. We need huge cuts in military spending and the end of our imperialistic wars.
5. Military aid to Israel should be discontinued. Israel should be required to obey UN resolutions and evacuate the West Bank and end its illegal siege of Gaza. If it fails to comply, UN sanctions should be imposed.
6. We need a massive stimulus program that will include building a new renewable energy infrastructure. We’ll have to spend an amount of money comparable to the defense budget.
7. A corporation’s tax should be based on its total world-wide income. Payments to each country should be proportional to the amount of corporate business done there. This will take some international cooperation.
8. Big corporations should be broken up into smaller units. If a corporation is too big to fail it’s too big to exist. (Nomi Prins said this about banks but I feel it applies to corporations also.) This is not as radical as it may appear to some. Two Republican presidents, Theodore Roosevelt and William Howard Taft, used the Sherman Anti Trust Law to break up the Standard Oil Trust, J.P. Morgan’s Northern Securities Company, the American Tobacco Company and U.S. Steel. (47) If it’s impractical to break up a “too big to fail” corporation, it should be taken over by the government.
9. The media companies, including the TV networks and newspaper conglomerates, should be broken into much smaller units.
10. A government agency should audit large corporations, or contract out the job to private companies of its own choosing.
11. Corporations should be banned from making political contributions.
12. All corporations above a certain size should be required to have democratic unions. Union representatives should be included on the boards of directors and should have a strong say in the running of corporations.
13. Corporations must not be allowed to use up valuable natural resources without a public benefit. Their taxes should reflect the social costs of their operations. For example, utilities that burn coal should be required to pay for the medical costs caused by the pollution they produce.
14. Large corporations should be required to serve the public interest. There should be periodic reviews that include public hearings. Communities directly affected by corporate operations should have a strong say in determining if a corporation serves the public. If a corporation was found to have done something wrong, for example, polluting the environment or mistreating workers, it should be taken over by the government until a new board of directors is put in place or it should be forced to go out of business. Hostile takeovers should not be limited to non government bodies. If a corporation chooses to incorporate overseas, it should be required to pay hefty fees to get permission to do business in the United States and its operations in the US should be subject to periodic reviews.
15. The United States should be reindustrialized. We should invest in highly efficient automated factories that make durable and useful products. The government should award contracts to companies to build the factories.
16. Everyone should have the right to a job.
17. Election campaigns should be publically financed.
18. The justice department should be given the resources to persecute corporate and white collar crime.
19. Labor laws should be rigorously enforced and the right to strike reaffirmed. The Taft Hartley Act should be abolished.
20. A strong well financed non commercial public broadcasting system should be created.
21. There should be stock and derivative transfer taxes to cut down on speculation. Derivatives and stock transfers should be highly regulated.
22. We need government controlled universal health care. The government should make contracts with drug companies to provide drugs at reasonable costs. If they don’t comply, the government should start its own drug companies. Drugs should be tested by the government, not by the companies that developed them.
23. Much of the offshore banking should be declared illegal. For example, it should be illegal for a corporation to set up an offshore special purpose entity for the purpose of avoiding taxes.
24. The New Deal laws such as the Glass Steagall Act and bans on excessive commodity trading should be reinstituted.
25. Electronic voting machines should be banned in favor of paper ballots.
26. Free education should be available to all who can pass reasonable exams for all through graduate school.
27. Universities should lose their accreditation unless a large fraction of the faculty has tenure.
28. A safety net shall be set up that assures security for all.
29. The prison industrial complex should be mostly shut down. Long sentences for drug possession should be eliminated. Addiction treatment and vocational training should be used instead.
30. The government should stop spying on its citizens. The intelligence apparatus should be dismantled.
31. We should have a federal flat tax with brackets. Those in the lowest bracket should pay no taxes and those in the highest bracket should pay 90 Percent. Hopefully,this will eliminate tax loop holes.
32. Several of our present Supreme Court justices should be impeached for conflicts of interest.
33. Great efforts should be made to insure that elections are free and fair. Republicans have become very skilled in disenfranchising voters. We probably need UN observers.
34. The maximum credit card interest rate should be 10 per cent.
35. There should be a new independent investigation of 9/11 with subpoena power.
The era of very cheap fossil fuel based energy is coming to an end. The world population is much larger than it used to be. We’re used to expending huge amounts of energy making many gadgets that were unheard of in my parent’s time. The world’s capacity to grow food is decreasing because of global warming, water shortages, and soil erosion caused by the unsustainable farming practices of big corporations. Many of us live in suburbs and expend much energy in transportation. We’ll have to live on a lot less than we’ve become accustomed to.
There’s so much work that should be done in this country, with our decaying infrastructure and need for a transition to renewable energy, and there so many unemployed who are willing to work. Yet the work is not getting done. As many have observed, “the system is broken.”
We have the technology to live in a sustainable way, yet we are wasting much of our human potential in fighting wars, and in a financial system that mostly just shuffles money around and transfers money from the middle class to the rich. Many feel they are justified in cheating a little because everyone in high places in cheating on a grand scale.
To form a society based on trust, with justice for all, we have to get rid of the great disparities of wealth that exist in this country. People are happier living in communities which don’t have great inequality. (48) The ruling class should not be above the law. They should not be permitted to destroy the planet and manipulate us into becoming consumers and spectators, not citizens. The culture of Wall Street and Washington is one based on greed. It has to change if we are going to survive.
But change won’t come easy. The powers that be are too entrenched. But one thing we can do, is to form small activist communities and local political machines which ignore the world of illusion, the consumer culture, and the super rich. In those restricted spaces we can provide the necessities of life, and build democracy, mutual trust and the rule of law. Strong communities can help generate the political power needed to implement the changes listed in the Brooklyn Consensus and to build the new ethic needed to turn the tide in the class war we are currently losing. I’ll finish with a quote, the last sentence in a book by Nafeez Ahmed (49):
Regardless of the chaos and destruction that may or may not arrive in the meantime as the
global crises unfold, the future nevertheless represents a realm of unprecedented hope and
the possibility to build a world based on compassion, peace and justice for all. And it will be grassroots communities that will lead the way to the new world.
1. Dave Pollard, “The Stock Market as Ponzi Scheme.” http://blogs.salon.com/0002007/2004/05/07.html
2. S&P 500: Total and Inflation-Adjusted Historical Returns
3. Nomi Prins, “Other People’s Money,” The New Press, New York, 2004, p. 197
4. Gary Weiss, “Wall Street Verses America” Penguin Group, New York, 2006
5. Kurt Eichenwald, “Conspicacy of Fools,” Broadway Books, New York, 2005, p. 351
6. ibid, p. 182
7. Ellen Brown, “Web of Debt,” Third Millennium Press, Baton Rouge, Louisiana, 2007, pp 187-190
8. Michael W. Hudson, “The Monster,” Times Books, Henry Holt and Company, 2010.
9. Subprime Lending: A Net Drain on Homeownership,CRL ISSUE PAPER NO. 14, March 27,2007
10. Michael W. Hudson, “The Monster,” Times Books, Henry Holt and Company, 2010, p 279.
11. Richard Clark, “Toward a better understanding of exactly how the banksters are stealing trillions form us,” http://www.opednews.com/populum/print_friendly.php?p=Toward-a-better-understand-by-Richard-Clark-110128-258.html&c=a
12. Dawn Kopecki and Catherine Dodge, “U.S. Rescue May Reach $23.7 Trillion, Barofsky Says (Update3),” July 20, 2009. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY0tX8UysIaM
13. David Health, “Too Big to Jail?” Huffington Post Investigative Fund, http://huffpostfund.org/stories/2010/05/too-big-jail
John Friend, “Bankers wreck economy and get rewarded, not prosecuted.”
14. John Christensen, “Africa’s Bane: Tax Havens, Capital Flight and the Corruption Interface,” http://www.realinstitutoelcano.org/wps/portal/rielcano_eng/Content?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/sub-saharan+africa/dt1-2009
15. Mark Zepezauer, “Take the Rich Off Welfare,” South End Press, Cambridge, Massachusetts, p 31.
16. Ian Griffiths and Felicity Lawrence, “Bananas to UK via the Channel islands? It pays for tax reasons,” http://www.guardian.co.uk/business/2007/nov/06/12
17. Mark Zepezauer, “Take the Rich Off Welfare,” South End Press, Cambridge, Massachusetts, 2004, p 33.
18. David Callahan, “Loop Hole Land: Time to Reform Corporate Taxes,” http://www.ourfiscalsecurity.org/taxes-matter/tag/david-callahan
19. David Kocieniewski, “G.E.’s Strategies Let It Avoid Taxes Altogether,” NY Times 3/24/11
20. Jesse Drucker, “Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes,”
21. Matt Taibbi, “Griftopia,” Spiegel & Grau, New York 2010, p 224.
22. Loretta Napoleoni, “Terror Incorporated,” Seven Stories Press, New York, 2005, pp203-205.
23. See for example:
David Ray Griffin, “Debunking 9/11 Debunking,” Olive Branch Press, 2007
David Ray Griffin, “The Mysterious Collapse of WTC 7,” Olive Branch Press, 2010
24. Vince Gonzales, “The War On Waste” CBS News, 1/29/2002
25. Peter Dale Scott, “The Road to 9/11,” University of California Press, 2007, pp14-16.
26. Terry Morrone, “The Energy Transition,”
27. Michael Betancourt, “Immaterial Value and Scarcity in Digital Capitalism,”
28. Nafeez Ahmed, “A User’s Guide to the Crisis of Civilization,” Pluto Press, 2010, pp 188-189
29. John Carney, “How AIG Lost Billions By Helping Short-Sellers,”
30. “AIG Bonus Payments Controversy”
31. Matt Taibbi, “Griftopia,” Spiegel & Grau, New York 2010, p 130.
32. Russell Grantham, “Paying a price for risky schemes,” The Atlanta Journal Constitution, 5/30/10, http://www.ajc.com/business/paying-a-price-for-538111.html
33. Huffington comments, Garymc8, “JPMorgan Settlement: Bank to Pay SEC Over 700M Over Charges of Illegal Payments”
34. “$600 Trillion Derivatives Bubble Set to Burst?”
35. Fred Sheehan, “Ben Bernanke: The Very Model of a Modern Pliant Bureaucrat,” 2/5/10,
36. Washington Blog, “Are Interest Rate Derivatives a Ticking Time Bomb?”
37. See for example:
“The Largest Research Fraud in Medical History,”
Terry Morrone, “Aids and 9/11,” http://dailycensored.com/2011/01/05/aids-and-911/
38. Jonathan Simon, “To The American Media: Time To Face The Reality of Election Rigging,”
39. Jpmassar , “Updated: 7583 Votes Magically Appear: Prosser Wins. (Not an April Fools’ Joke),”
40. “Poll: Israel, Iran, U.S. have most negative image,” http://www.msnbc.msn.com/id/17474900/ns/world_news/
41. Nafeez Ahmed, “A User’s Guide to the Crisis of Civilization,” Pluto Press, 2010, p192.
42. Lewis Seiler and Dan Hamberg, “Rule by fear or rule by law?” San Francisco Chronicle 2/4/08
43. William Faloon, “The Genetic Drug Rip Off,”
44. Ken Little, “Small farms brace for new food safety regulations,”
45. Michael Brune, “Coming Clean,” Sierra Club Books, San Francisco, 2008, pp 73-74
46. Ellen Brown, “Web of Debt,” Third Millennium Press, Baton Rouge, Louisiana, 2007, pp 36-45.
47. Progressives and the Era of Trust-Busting
48. Tom Ashbrook. “How Inequality Hurts Society,”
49. Nafeez Ahmed, “A User’s Guide to the Crisis of Civilization,” Pluto Press, 2010, p 258.
Picture courtesy of, “Brooklyn Bridge Gallery”