Rewarding The Rich, Regulating The Rest
As the revolutionary anti-plutocratic Occupy Wall Street movement traverses the country (and the world) perhaps we should pause for a moment to inventory our refrain. Put squarely, the formal deployment of the term “occupy” is both violent and imprecise. We radicals –particularly we white radicals— must recognize that “America” has been unjustly occupied for the past 500 years and we, in fact, tread on indigenous land. Our country was built on a condition of double theft. Therefore, instead of uncritically ratifying the language of “occupation” I suggest a more pointed and non-colonial shibboleth, that is, “De-Leverage Wall Street.” At the very, very least (and in the short term) we must agitate to “de-leverage wall street” by reducing its debt-to-equity ratio. The slogan is admittedly clunky and so I offer it with weighty reservation. Nevertheless, I argue that it is Wall Street’s unsteady debt-to-equity ratio that is predominantly responsible for our 20% rate of underemployment, our poverty rate of 15%, and a devastating 80% loss of wealth among black households since 2007. (White households lost about 20% of their wealth.) I assert that de-leveraging Wall Street must be the first step in a multi-tiered, variably registered approach to creating enduring material justice for workers, people of color, the homeless, radical leftists, and the poor (and for those who inevitably inhabit multiple social positions).
Perhaps we should be judged on our treatment both of prophets and profits. In 1848 Karl Marx published the Communist Manifesto. In it he famously noted that under conditions of unremitting capital accumulation “All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind [:] the need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe. It must nestle everywhere, settle everywhere, and establish [connections] everywhere.” Marx’s elegant prescience here is remarkable as he aptly describes the inevitability of globalized capitalism, a phenomenon that we euphemistically refer to as “globalization.” Marx knew that profits have to be capitalized and launched into circulation to expand. That is, he was aware that for capital to persist it must be committed to a compounding rate of growth. (The global economy has grown at an average rate of around 2.25% since 1750. Growth in the U.S. stands at an anemic .9%). So what happens when corporate leaders cannot find acceptably profitable investment opportunities for their surplus? They turn to finance, and then they leverage.
From 1820-1970’s real wages among U.S. workers kept pace with rising productivity. During this unprecedented period of (white) prosperity extra goods and services generated by increased productivity were purchased by the extra demand generated by rising wages. Workers, after all, are consumers. Beginning in the mid-1970’s, however, the growing power of corporate leaders (http://www.christopherfrancispetrella.net/2011/03/whenever-i-watch-fox-n...) enabled them to repress real wages while productivity continued to rise. Such circumstances produced two interrelated problems: 1) with increased productivity there was a growing surplus of goods which were not being purchased. That is, supply was beginning to outstrip demand. And, 2) with wages being repressed there was insufficient aggregate demand to absorb the excess goods and services produced. One straightforward solution to such a challenge would have been for corporate leaders to offer goods and services more cheaply to their consumers thereby leading to a reduction in profit margins. Such a maneuver, however, is generally anathema to capitalism.
Instead, corporate leaders solved the problem of limited effective demand by the creeping financialization of our economy. According to Paul Volcker, former Chair of the U.S. Federal Reserve, the financial sector (including insurance and real estate) accounted for over 20% of the GDP in 2007. In 1970 that proportion was a scant 5%. http://www.bea.gov/industry/gdpbyind_data.htm By the mid-1970s it was became clear to the owners of corporations that continued profits from manufacturing were less and less secure and that they needed to develop some other means of increasing demand while growing profits. Enter the credit card. Corporate banks incentivized debt borrowing through the provisioning of cheap credit. But where was the liquidity to come from? In a word: leveraging. During the early 1980’s, according to noted scholar David Harvey, banks typically lent three times their deposits, the so-called leverage ratio. But by 2005 the ratio had jumped to 30:1, meaning that banks managed to leverage depositor money by a rate of 3000%. This, more or less, is the assumption on which derivative transactions are premised.
In this instance the term “leverage” refers to the process of investing with borrowed money. Moreover, the leverage ratio—also known as the debt-to-equity ratio—indicates the extent to which a business relies on debt financing. Even conservative economists contend that an acceptable upper limit of the debt-to-equity ratio is around 2:1. But how was leveraging to the order of 3000% made possible?
Under President Clinton a congressional republican majority passed the Commodity Futures and Modernization Act of 2000 (CFMA) ensuring the deregulation of “financial products” known as derivatives. The law exempts derivative traders and other “qualified investors” (those defined as investing over $5million) from regulations stipulated by the Commodity Exchange Act of 1936. The Commodities Exchange Act of 1936 expressly prohibits the manipulation of commodity futures prices.
With the passage of CFMA new unregulated investments could be highly leveraged. Leveraging is a fairly common instrument for investment but markets for working and middle- class investors are highly regulated and therefore bound the amount one can leverage. For example, the Securities and Exchange Commission (SEC) requires that purchasers of common stock put up at least 50% of the cost of the “commodity” on the American stock exchange. Derivatives traders have no such restrictions; perhaps this explains in part why hedge funds grew in aggregate by 800% from 1999-2008.
None of this is to suggest that leverage per se is noxious; leverage, after all, helps many working and middle-class people to purchase homes. However, a 3000% ratio of leverage –as was the case for AIG (American International Group)—is at best, asinine, and at worst, criminal. And both the corporate capitalists of Wall Street and the privileged plutocrats of Washington tend to reward both.