Newsletter: After The Crash…
“We have never had a year start the way that 2016 has started. In the U.S., the Dow Jones Industrial Average and the S&P 500 have both posted their worst four-day starts to a year ever. Canadian stocks are now down 21 percent since September, and it has been an absolute bloodbath in Europe over the past four days. . . There has been an emergency suspension of trading in China two times within the past four days, and nobody is quite certain what is going to happen next. Eventually this wave of panic selling will settle down, but that won’t mean that this crisis will be over. In fact, what is coming is going to be much worse than what we have already seen.” The Economic Collapse Blog.
The market is crashing. Even corporate mass media are reporting this reality, with CNN calling it “a global market freak-out.” However, the media have generally blamed the dismal markets in China. There is no discussion in mainstream media of the fundamental problems in the US economy that are the real reasons why the next crash will be worse than the 2008 collapse.
Fundamental Problems in the Economy
We seem to be at the beginning of the economic collapse predicted by many for 2016. The predictions call for a collapse worse than 2008. There are trillions of dollars more in high risk investments and central banks are over-leveraged. After central banks shifted trillions to wealthy businesses after the last collapse, they are now in a weaker position to respond to the next collapse. The Federal Reserve is leveraged at 78 to 1, for comparison Lehman Brothers was at 30 to 1 when it triggered the 2008 collapse.
The US commodities markets are at depression-era levels not seen since 1938. Wholesale sales collapsed creating an inventories-to-sales ratio that is the highest since 2008’s crisis and as high as the worst in the 2001 recession. The risky derivatives market is now at $555 trillion in a global economy that is $70 trillion. You read that correctly – risky investments are nearly eight times the total global economy. This is a giant bubble ready to pop.
There will be confusion as this crash unfolds. In the midst of the 2008 collapse there were days with large growth on the markets. Just this week we saw a confusing jobs report that noted 292,000 new jobs. The headline sounds good but when you look at the details, there continue to be fundamental labor problems, e.g. hourly wages saw their first decline since 2014, the number of unemployed was unchanged, the number of long-term (27 weeks) unemployed was unchanged and labor force participation remains very low at 62.6 percent.
The reality of the US labor force is not a pretty one and explains the drop in wages. Economist Jack Rasmus writes “Median wages for non-managers are still below what they were in 2007, and households are piling on new debt again to pay for rising medical costs, rents, autos, and education.” Zero Hedge reports there continues to be a surge in minimum wage jobs e.g., food service, waiters and bartenders, bringing the total to a new record high of 11.3 million while high-paying manufacturing jobs remain flat. Since the 2008 crash the US has lost 1.4 million of the latter and gained 1.6 million of the former. The US is also at an all-time high of temporary workers, who made up half the new professional and business jobs. And, there are now 7.7 million people holding multiple jobs in order to make ends meet. This is the highest level since just before the last economic collapse. The wealth divide has become extreme with the richest 20 people own more than the bottom half of the US – 152 million people combined.
As it did in the early 20th century, capitalism itself is failing once again, especially this late stage predatory capitalism with its corrupt financial market domination. It’s time for a new system.
Capitalism serves the well-being of the holders of capital. The concentration of wealth in the few along with the financialization of the economy has made capitalism dangerous to the 99%. Capitalism works for capitalists by ensuring workers are paid less than the wealth they create while consumers pay more for their necessities and debtors are stuck in a cycle of debt they cannot escape. Resources are extracted as inexpensively as possible despite the impact on the planet, public health and safety; while the costs of extraction and production are externalized to the people through corporate welfare and crony capitalism. When capitalist bets go bad they are backed up by a corrupt government while the non-capitalists lose their homes, life savings and incomes.
We are bumping up against the limits of living on a finite planet. We can no longer continue with business as usual. The values of stocks are based on fraudulent assessments, not values based in reality. Economists predict that at best the global economy will be stagnant, just bumping along the bottom for the foreseeable future, and at worst there will be a deep crash.
If the 2016 collapse occurs, it would be the third speculative bubble burst in the last 15 years, the losses will be immense. The inter-related deep corruption throughout the financial and political systems continues as it did in the previous collapses. For the lay person, the current movie, “The Big Short,” explains the corruption that caused the 2008 collapse – not much has changed, in fact one character from the movie said that it is worse now because nobody was punished. The panic of the last collapse came quickly and involved complicated financial transactions that even experts did not understand at the time. While the complexity continues, this time we understand them and can see through the complexity and see the corruption.
A movement sprang up out of the last collapse, the Occupy Movement, has since grown and dispersed into other areas where people are organizing around issues like debt, especially student debt, home foreclosures, banking regulation and livable wages. The Black Lives Matter movement, which is primarily focused on police violence, also understands the racially unfair economy. And, the movement against corporate rigged trade agreements like the TPP has united movements and shown people how economics impacts everything from food, water and the environment to labor and banking regulation to the Internet and more. We are all connected.
Joseph Stiglitz says “The obstacles the global economy faces are not rooted in economics, but in politics and ideology.” This time there is a growing mass movement that can change the politics and ideology at the same time that the influence of big finance will diminish. What should the movement be demanding as this next collapse develops? How do we unite to impact economic policy and put in place a transformation to a new economy that serves the people and not big finance?
First we should insist on two things which require not repeating the mistakes of the last collapse (1) Those involved in fraud or other illegal activity need to be prosecuted criminally and the concentrated power of mega banks needs to be ended as they did in Iceland; and (2) The rhetoric of bailing out Main Street not Wall Street needs to become reality by taking back the constitutional power to create money from the Federal Reserve and funding people’s necessities.
We live in a time of corrupt economics and since the last economic collapse the cheaters, who commit fraud and other crimes, were not prosecuted but rewarded. What lesson does the failure to criminally prosecute teach? Bill Black, a leading financial crimes investigator, points out, “Bad ethics drive good ethics out of the marketplace because cheaters prosper.” Failure to prosecute makes bad ethics and criminal behavior the norm because those who commit economic crimes profit.
Not Too Big To Jail
After the last crash, the actual policy of the Department of Justice (DOJ) was not to prosecute the big banks. It was believed that they were too big to prosecute and jail because of the feared impact it would have on the economy. The other side of the coin was not considered: the impact on the economy when government allowed leading bankers to commit fraud without prosecution. The performance of the FBI, SEC and DOJ, among others charged with regulating the banks and enforcing the law, were all inadequate. Banks were fined, but inadequately compared to the impact of money lost or stolen by their actions; criminal prosecutions were rare, so few individuals were held accountable. Why? Corruption of federal agencies through the revolving door of big pay-offs. This is evident at top levels of government, for example former Attorney General Eric Holder went back to his big business, big bank law firm, Covington and Burling to a multi-million-dollar annual salary.
The big banks need to be broken up and policies must be put in place to prevent them from getting too big again. After the economic collapse rather than shrinking, the big banks grew. Why? Because in addition to being too big to jail, they were too powerful for Congress to confront. Sen. Dick Durbin (D-Illinois) admitted: “And the banks – hard to believe in a time when we’re facing a banking crisis that many of the banks created – are still the most powerful lobby on Capitol Hill. And they frankly own the place.”
Once the banks are broken up we need to ensure they cannot get too big again. A cap could be put on the banks perhaps based on a percentage of the GDP. Or as Dallas Federal Reserve Chair Richard Fisher suggests they should be limited to $100 billion. There is actually a good deal of support for breaking up the big banks among members of the Federal Reserve, former bank CEO’s and political leaders.
There is already wide support among the public and economists for breaking up the big banks. Half of Americans support breaking up the big banks and only 23 percent oppose it, according to a 2013 Rasmussen Poll. And an IMG Forum survey of 39 US economists shows that a majority, 54 percent, either agreed or strongly agreed that we should shrink the big banks. Only 10 percent disagreed, and no one strongly disagreed. The next collapse will increase that support and the movement needs to build a massive national consensus that this is essential.
Another tool for preventing the banks that are too big from returning is to create a new financial system that serves the people. Private banks can be made into public utilities that are brought into the public domain and used to serve the goals of the economy. In addition, public banks modeled after the successful public bank in North Dakota could be created at the local, state and national levels of government; as well as credit unions and community banks that serve their members and their communities. There should also be the possibility of complimentary currencies that enhance the economy.
If there is another economic collapse, how do we invest in Main Street to meet the needs of the people and planet? A key question is: where does the money come from?
Article I Section 8 of the Constitution gives Congress the power to create money and regulate its value. The creation of money is a public function, perhaps more important than any other function but this power was given to a semi-private corporation, the Federal Reserve in 1913. There is no constitutional requirement for money to be created by the Federal Reserve and loaned to the banks who then loan it to government, business and people at a profit. The government can re-take its constitutional power to create money. This would mean creating debt-free money, as Ellen Brown of the Public Banking Institute writes:
“Virtually all money today is created as bank debt, but people can no longer take on more debt. The money supply has shrunk along with people’s ability to borrow new money into existence. Quantitative easing (QE) attempts to re-inflate the money supply by giving money to banks to create more debt, but that policy has failed. It’s time to try dropping some debt-free money on Main Street.”
Opposition to this approach of creating money without a middleman will come from the banks, who are the middlemen who profit from debt-based money. Debts also give them power over governments that rely on bonds to build essentials for their community and borrow money for the ongoing functioning of government. They will claim it will cause hyper-inflation, when in fact it is deflation we need to worry about.
Bill Black argues that the Federal Reserve can be made very small and be mechanical in the setting of interest rates. Others argue that the Fed could be ended and the responsibilities of a monetary authority could be created in the Treasury Department to prevent inflation and deflation. Moving the money creation function into the federal government would place it within the US constitutional system of checks and balances to work for the whole society, not only for the bankers and the privileged.
What could debt-free money be used for? There are all sorts of needed programs, infrastructure and energy transition are in urgent need. Infrastructure – roads, bridges, water systems, the power grid and more – are antiquated and dilapidated. The American Society of Civil Engineers grades US infrastructure D+ and sees an urgent need for over $3.6 trillion in spending to bring existing infrastructure to safe levels by 2020.
The US needs to set an aggressive agenda of transition to a carbon-free, nuclear-free energy economy in ten years to confront climate change and the environmental damage of dirty energy. This transition will impact multiple parts of our economy especially housing, transit and technology on clean energy, batteries and transmitting energy.
The debt-based money system has created massive debt at all levels; in government, business and among individuals, especially unjust debts like for college education which should be erased with debt-free money.
Another collapse is likely to result in another wave of foreclosures that could be prevented by rewriting mortgages to reflect the actual value of properties and make them affordable. Land trusts can be created so communities can control housing prices and community development so people can afford to stay in their homes.
Urban areas, where most of the population lives (see photo to the right), have been neglected for generations and can be provided funding for the many urgent needs they face.
Education from pre-school through graduate school could be adequately funded so there is no tuition and there are sufficient teachers and support staff.
Medicare could be upgraded to end co-pays and improve coverage and be expanded to cover everybody.
We could also be facing up to the reality of inadequate jobs in the future due to globalization outsourcing, robotics and artificial intelligence by putting in place a guaranteed basic income. What would you do with $1,000 of guaranteed income each month?
A Basic Income would also end poverty as well as end poverty programs. The reality of lack of jobs and a basic income is not discussed by any current candidate even though in 1972 both Nixon and McGovern favored various forms of a basic income.
The list of urgent needs is lengthy.
The debt-based economic system has prevented governments from meeting the needs of people and planet. Doing so would create a full employment economy that would provide a foundation to the economy, building up rather than the failed trickle down.
The Movement Must Change the Political Calculus to Create an Economy for All
Nobel Laureate Joseph Stiglitz describes the current situation as “the Great Malaise.” Even the head of the IMF, Christine Lagarde, calls it the “new mediocre.” Many others are predicting a collapse greater than 2008. And, for most of us there has never been a full recovery from the 2008 collapse.
The economic agenda described here would create a radical transformation of the economy from a top-down system designed for the wealthiest, to a bottom-up system that benefits all. Putting in place this economy would move us from a plutocratic economy to a democratized economy where people have economic control over their lives.
It is a radical shift – how can it happen? There is only one path – the people must be educated, organized and mobilized to demand it. We need to change the political culture to one where the necessities of the people and protection of the planet are the priorities of the economy.
Some may say that such a radical shift is not ‘politically feasible’ but what is realistic politically can be changed by popular movements while what is reality doesn’t change. An economic crisis is an economic crisis and we can either accept the inadequate solutions that will be offered or we can redefine what is political reality to be consistent with reality.
If predictions are correct, the next economic collapse will be deeper and more damaging than the 2008 collapse. It will be a tremendous opportunity to put in place radical economic change. It is one the movement for economic, racial and environmental justice should be preparing for now.