This predatory exploitation is only possible if the central bank and state have partnered with financial Elites.
After decades of denial, the mainstream has finally conceded that rising income and wealth inequality is a problem–not just economically, but politically, for as we all know wealth buys political influence/favors, and as we’ll see below, the federal government enables and enforces most of the skims and scams that have made the rich richer and everyone else poorer.
Here’s the problem in graphic form: from 1947 to 1979, the family income of the top 1% actually expanded less that the bottom 99%. Since 1980, the income of the 1% rose 224% while the bottom 80% barely gained any income at all.
Globalization, i.e. offshoring of jobs, is often blamed for this disparity, but as I explained in “Free” Trade, Jobs and Income Inequality, the income of the top 10% broke away from the bottom 90% in the early 1980s, long before China’s emergence as an exporting power.
Indeed, by the time China entered the WTO, the top 10% in the U.S. had already left the bottom 90% in the dust.
The only possible explanation of this is the rise of financialization: financiers and financial corporations (broadly speaking, Wall Street, benefited enormously from neoliberal deregulation of the financial industry, and the conquest of once-low-risk sectors of the economy (such as mortgages) by the storm troopers of finance.
Financiers skim the profits and gains in wealth, and Main Street and the middle / working classes stagnate. Gordon Long and I discuss the ways financialization strip-mines the many to benefit the few in our latest conversation (with charts): Our “Lawnmower” Economy.
Many people confuse the wealth earned by people who actually create new products and services with the wealth skimmed by financiers. One is earned by creating new products, services and business models; financialized “lawnmowing” generates no new products/services, no new jobs and no improvements in productivity–the only engine that generates widespread wealth and prosperity.
Consider these favorite financier “lawnmowers”:
1. Buying a company, loading it with debt to cash out the buyers and then selling the divisions off: no new products/services, no new jobs and no improvements in productivity.
2. Borrowing billions of dollars in nearly free money via Federal Reserve easy credit and using the cash to buy back corporate shares, boosting the value of stock owned by insiders and management: no new products/services, no new jobs and no improvements in productivity.
3. Skimming money from the stock market with high-frequency trading (HFT): no new products/services, no new jobs and no improvements in productivity.
4. Borrowing billions for next to nothing and buying high-yielding bonds and investments in other countries (the carry trade): no new products/services, no new jobs and no improvements in productivity.
All of these are “lawnmower” operations, rentier skims enabled by the Federal Reserve, its too big to fail banker cronies, a complicit federal government and a toothless corporate media.
This is not classical capitalism; it is predatory exploitation being passed off as capitalism. This predatory exploitation is only possible if the central bank and state have partnered with financial Elites to strip-mine the many to benefit the few.
This has completely distorted the economy, markets, central bank policies, and the incentives presented to participants.
The vast majority of this unproductive skimming occurs in a small slice of the economy–yes, the financial sector. As this article explains, the super-wealthy financial class Doesn’t Just Hide Their Money. Economist Says Most of Billionaire Wealth is Unearned.
“A key empirical question in the inequality debate is to what extent rich people derive their wealth from “rents”, which is windfall income they did not produce, as opposed to activities creating true economic benefit.
Political scientists define “rent-seeking” as influencing government to get special privileges, such as subsidies or exclusive production licenses, to capture income and wealth produced by others.
However, Joseph Stiglitz counters that the very existence of extreme wealth is an indicator of rents.
Competition drives profit down, such that it might be impossible to become extremely rich without market failures. Every good business strategy seeks to exploit one market failure or the other in order to generate excess profit.
The bottom-line is that extreme wealth is not broad-based: it is disproportionately generated by a small portion of the economy.”
This small portion of the economy depends on the central bank and state for nearly free money, bail-outs, guarantees that profits are private but losses are shifted to the taxpaying public–all the skims and scams we’ve seen protected for seven long years by Democrats and Republicans alike.
Learn how our “Lawnmower Economy” works (with host Gordon Long; 26:21 minutes)
TIVOLI, New York — It’s hot here in the Hudson River Valley.
People are taking it easy, sitting on benches in the shade. We had to put in a window air conditioner to take some of the heat out. Still, we sweat … and we wait for the cool of the evening.
The markets are lackluster, too. A little up, a little down. Languid. Summertime slow.
We have been focusing on technology — sometimes directly, often obliquely.
It is the subject of our next monthly issue of The Bill Bonner Letter, requiring us to do some homework with the help of our resident tech expert, Jeff Brown.
But today, let’s look at how the stock market reacts to new technology.
Investors are supposed to look ahead. They are expected to dole out the future earnings of technology stocks and figure out their present value.
Not that they know immediately and to the penny what Twitter or Tesla should be worth, but markets are always discovering prices, based on public information flowing to investors.
The problem is the feds have distorted, twisted, and outright counterfeited this information. They falsified it for the benefit of the people it’s supposed to be protecting us against: the insiders.
The entire edifice of federal regulation and policing is a scam — at least when it comes to the stock market.
First the feds claimed to be creating a “level playing field” by prohibiting “insider trading.”
If you had privileged information — say, as the accountant for a Fortune 500 company, or the lawyer for an upcoming merger — you were supposed to play dead.
“Front-running” — buying or selling in advance of the public release of information — is against the law. And in 1934, Congress set up a special bureaucracy, the Securities Exchange Commission — to enforce it.
Tilting the playing field
But the SEC never leveled the playing field. Instead, it tilted it even more in the insiders’ favor.
Those who knew something were not supposed to take advantage of it, so this information became even more valuable.
That is why so many investors turned to “private equity.” Insiders at private companies — held close to the vest by the investment firms that owned them — could trade on all the inside information they wanted.
The law prohibits insiders from manipulating a publicly traded stock for their benefit.
But there’s an odd exemption for the people who control a public company. General Motors announces a share buyback plan, for example. It will spend $5 billion to buy back its shares in the open market and then cancel them. This raises the earnings per share of the outstanding shares, making them more valuable as a result.
Why would an automaker — recently back from the dead, thanks to a handout from the feds — take its precious capital and give it to management (in the form of more valuable stock options) and shareholders (in the form of higher stock prices)?
There you have your answer: GE execs and their insider shareholders (mostly hedge funds) joined forces to manipulate the stock upward and give themselves a big payday.
Reports the Harvard Business Review:
‘A little coup de whiskey’
Here at the Diary, we disagree …
The feds should not ban share buybacks. Instead, insider trading should be legal for everyone.
And the feds shouldn’t bail out the insiders, either. The government bailed out GM to the tune of $50 billion in return for a 61% equity stake in the company.
But at the end of 2013, Washington was able to sell off the last of its GM shares … for “just” an $11 billion loss.
The Fed fiddled with stock market prices … by pushing down the so-called “risk-free” rate on bonds. A lower rate means less opportunity cost for stock market investors.
Just look at the valuations of today’s tech companies. They’re over the top, much like they were at the peak of the dot-com bubble in 2000. They are driven to extraordinary levels not by a prudent calculation of anticipated earnings but by the Fed’s EZ money regime.
This conclusion, by the way, was buttressed by our look at the automakers of 100 years ago.
Now, there was a game-changing industry!
It was so promising and so crowded with new entrants that you could barely walk down Shelby Street in Detroit without getting run over by an automobile you’d never heard of.
Most of those companies went broke within a few years. A few, however, prospered.
GM’s share price barely budged between 1915 and 1925 — when the company was one of the greatest success stories of the greatest new tech industry the world had ever seen.
But then, in 1927, the influential New York Fed President Benjamin Strong gave the market “a little coup de whiskey.”
The Fed not only bought $445 million of government bonds, resulting in the biggest increase in bank reserves the US had ever seen, but it also cut its key lending rate from 4% to 3.5%.
After that, it was off to the races! GM shares rose 2,200%.
In other words, the prices of “tech” stocks were manipulated then, as now, by the feds.
Cheap credit — not an honest calculation of anticipated earnings — is what sent GM soaring in the late 1920s.
And it is why our billion-dollar tech babies are flying so high today.