An accurate term to describe the causes of and prescriptions to the current economic crisis is “the looting of America.” That is also the title of a new book by Les Leopold, co-founder and director of the Labor Institute and Public Health Institute and among those who formed the labor-environmental Blue-Green Alliance.
Leopold attempts through the book the near impossible: to clearly and simply describe the root causes of the global economic crisis, the bizarre and complex financial instruments created which resulted in astonishing profits by transformed liabilities into assets, and a range of moderate to radical policy changes to reign in the fantasy-finance casino perpetrated by giant financial corporations and others.
The root of the current crisis goes back to the 1970’s when worker productivity and real worker wages began to diverge. Between 1945 and 1973, as productivity increased (more products and services were produced by workers per hour), firms sought more workers to increase their own profits. This drove up the price of labor.
It all changed beginning in 1973 when corporate owners no longer reinvested productivity profits back into firms (the real economy) or with workers to the same degree. Capital owners kept productivity profits for themselves. The percentage of wealth owned by the top 1% began to sour. Capital owners began looking for alternatives sources of profit of their extra wealth with high rates of return and little risk. The era of fancy financial instruments, led by derivatives, was born.
The derivative, credit default swap, collateralized debt obligation, and other fantasy finance “instruments” are defined and explained with excellent analogies in many cases. Derivatives, for examples, are compared to fantasy baseball where hundreds if not thousands of persons compete by betting on the statistics of real players yet none of whom actually own any of the real baseball teams or have any control over any of the real players. Similarly, derivatives derive their value from some real entity – a stock or bond. Hundreds, if not thousands, can own bets on the same single stock or bond. It’s a financial casino.
The flood of hundreds of billions of dollars into the casino economy fueled more and riskier bets and the housing boom. It enriched the financial corporations that were involved in this new business. As wages declined, debt increased and consumer spending eventually slowed. Meanwhile, real businesses were unable to secure credit for innovation as financial institutions looked to fantasy finance as more profitable.
The housing and debt bubbles burst because that what bubbles do.
Leopold devotes the last two chapters to solutions – divided between, as he says, “Proposals Wall Street Won’t Like” and ones they really won’t like.
In the former category are:
- Financial Disaster Insurance – premiums from every conceivable financial sector transaction to pay back taxpayers from the current raid on the treasury and for the recession caused by the financial casino and for the next one. He estimates this could amount to $500 billion per year.
- Financial Product Safety Commission – creation of an FDA-like product-approval process before any type of financial “instrument” is permitted on the market.
More radical proposals include:
- Wage caps – a $500,000 salary cap of any employee at any financial corporation – the salary of the US President.
- Passage of the Employee Free Choice Act – to give workers a chance to increase their collective power.
- Raising the minimum wage – to guard against deflation and to shift wealth away from the fantasy-finance casino.
- Public takeover the largest pieces of the private financial sector – to protect taxpayers, our economy and what’s left of our democracy.
Leopold has provided a valuable tool to demystify Wall Street’s destructive actions and a variety of tools for public actions to assert greater public control over money and finance.