One micron is about ten gold leaves thick. The gilded age, one. Since, and yet, there are those who would return the nation to that time. To their minds, it was the best of times; that all that need be done was rid the nation of the odious Progressive and New Deal Era laws that in fact had had nothing to do with the age’s demise, and the labor unions that formed up during the period; then let the laws of capitalism and of free markets take their course. For these some, and seems quite a few more of us, in times of change, when the future is unclear, it is, “backward ho!” After the 1960s, came the 1970s. By the 1970s, the times were really changing.
One way to figure out what was happening in the 1970s was to not even try; was to just pretend that it wasn’t the beginning of something new, that nothing had really changed. But, rather that it was that the gods were angry with us, were telling us to reform our regulatory ways.
Neither capitalism nor markets needed regulation. So sayeth Ayn Rand, and Milton Friedman. No matter that Ayn Rand wasn’t an economist, nor a philosopher. That she wasn’t even really Ayn Rand. The Fountainhead and Atlas Shrugged were fiction. All the better for those who loved a good myth; were too old to believe in Santa or play Cowboys and Indians; and, yet, were too young to be able to think very well. These were narratives for high school boys, professional athletes, uber nerds; for any and all the would be libertarians. Recall: It was the narrative that won the west. They who control the narrative control the world. Ayn was the Zane Grey of her time; Milton Friedman, of his. All that remained was to find someone to play John Wayne, and a horse. Alisa Zinovyevna Rosenbaum left Russia in 1926 for America; to write plays and to learn how to make movies.
“Money knows best.” Is the one true measure. “There needs to be a cost-benefit analysis.” If there is no direct net economic (monetary) benefit, then the regulation must go. Ayn was right. Upton and FDR were wrong. No metric for social; so it doesn’t count. Defense somehow does. So it began.* The regulatory agencies themselves, even the courts bought in. Or, was it that they were bought? And, there must be less reporting requirements! All the paperwork is jamming up the gears. Finally, once and for all, they would begin ridding the nation of the disastrous Progressive and New Deal Era regulations, social programs, and unions.
*There had been an earlier, first attempt, the Administrative Procedures Act of 1946, was intended to define the limits of regulatory authority so that they were not in conflict with the authority accorded to the legislature by the constitution. After lengthy deliberation and negotiation, the Act turned out pretty well.
Always trust your indication; else, another Three Mile Island, or Chernobyl. The Home State Savings Bank failure in 1985 was a wake-up. Silverado Savings and Loan, 1988; Lincoln Savings and Loan, 1989; and Midwest Federal Savings & Loan, 1990; wouldn’t have happened if they had. Were proof positive the dogma was wrong. Yet! Who are you going to believe? The indication couldn’t be right.
Still and yet, it was full speed astern, “backward ho!” Out with Glass Steagall! In with cost-benefit analysis! The dollar over all! Bankers know best! With the likes of the Honorable Republican, nee Dixiecrat, then-Senator, Phil Gramm at the helm, what could possibly go wrong? In no particular order — Boeing, Sears, Penney’s, healthcare, 2008, Merrill Lynch, E.R. Doctors, GE, ENRON, PG&E, increased income and wealth disparity, homelessness, the recent pandemic response, and all the recent recall attempts. These were some of the effects. What were the causes?
First, we need to know what was going on in 1970. At the time, the nation was either clueless, in denial, or both. Has been ever since. Insisted, rationalized, hoped, that we could somehow undergo great economic dishevel without changing. That we could shift from a production of goods, manufacturing based economy to a finance (sometimes mistakenly called global and/or service) based one without missing a beat.
The shifting to a finance based economy was premised. We would be following the United Kingdom’s example much as we had in instigating the 1898 Spanish-American War. Then, we were going to develop the colonial economic model. This time, we, as Britain had, would throw off industrial production and go financial. Took care of the American capitalist’s labor problem. Five for the price of one in Mexico, ten in Asia. Provided a good time, a good excuse, to deregulate. Ours was to be an “ownership society,” the man said.
Deregulation was the hole through which ENRON drove a truck bomb. A hole opened by the broadly successful deregulation of the airline industry in 1978. By lobbying extensively, spending $Millions, in state after state; ENRON ‘unleashed the power of the market’ for energy. More accurately, ENRON planned to control the energy market; to make $Billions off its political investment. November 2001, that truck exploded. Afterward, there was no more ENRON. The big hole in the ground was a lot of bankrupt investors, utilities, cities, and states.
Before the blast, with the most gracious help of the Mrs. Phil Gramm, ENRON forced Northern California’s once great PG&E into bankruptcy. Left the customers holding the bag. Quickly circled in the hedge-funds and the Wall Street Bankers. Too soon, followed the 2010 San Bruno gas explosion. The explosion wasn’t an accident; it was negligence in the name of cost cutting in the name of maximizing shareholder/investor return. What else mattered? Money always knows best. Instead of spending on needed maintenance, the New PG&E had lavished money on Commissioners, deregulation, investors, and shareholders. In 2019, all hell broke loose in a fire in Santa Rosa. The high temps, high winds, dry grasses, and dead trees tinderbox conditions were due to Global Warming. PG&E furnished the match. Got the bill because of improper and inadequate maintenance due to cost cutting measures meant to maximize shareholder/investor returns. Neither Harvard, Wharton, nor MIT have figured it out to this day. What’s to know? Things are booming in Texas.
Seems Boeing Aircraft had succeeded in spite of its engineers thinking that they should have a say and union members demanding a say in production practices. Just think what Boeing could do without them. Besides, finance types never liked unionized engineers or workers. Engineering was too hard to quantify. Unions skewed the market. We’ll offshore fabbing the fuselages to China, and go south for assembly. South Carolina, where they show management proper respect. As for regulation? Best if done in-house; more cost effective. Management up from an in-house farm system must go. Out of touch with the times. Any recent Harvard MBA could do a better job. What would Jack Welch do? Next, a financial corporation based in Chicago. Watch us go. Put those huge engines out in front of the wing on the 737 of 50 year old design, jigger a center of gravity fix without telling anyone, we’ll save tons on re-engineering, and make a killing. Did, too. The 737 MAX was the culmination of Boeing becoming a financial services company in the new finance based, union-busting, and deregulation/(regulation capture) economy. Boeing’s becoming an important financial services company was a consequence of its merger with/(acquisition of) McDonnell Douglas in 1997. The Gramm-Leach-Bliley Act repealed part of the 1933 Glass-Steagall Act making financial services more attractive than aircraft manufacture. Gramm was on a roll. So was the changing of our economy into one more financially based.
Boeing got a lot of its management ideas from ‘Neutron Jack’ at General Electric (GE); ‘Neutron Jack’ being the nickname for Jack Welch who ran GE from 1980 until 2000. Some of Boeing’s management team during the fall from greatness trained under Welch; had brought the thirst for financial focus with them. Boeing wasn’t alone. For twenty years, Welch was a dominant figure in American industry and finance; in the world’s. Showed them how to get it done. Seems chickens do come home to roost. Falling from the DJIA had to hurt.
Sears and J. C. Penney extend back to the gilded age. Both were built from the ground up to meet the consumers’ needs. Which they did quite well for generations. Their stuff wasn’t fancy but it was always ‘worth the money’. Working people across America depended on them, swore by them. They were even good places to work; to retire from. Fostered employee/employer allegiance.
What a dumb way to run a business. Seems, they also hadn’t heard about maximizing margins and shareholder/investor returns; of planned obsolescence. Why sell the customer a pair of pants that would last a year when you can sell them three pair that might? Results — Poof! Seems a finance based economy wasn’t good for Sears, J. C. Penney, or for working people after all. Also seems, that the pursuit of cheap manufacturing can be hazardous to a company’s health. No survivors found at the scene; just the skeletons. Some of the old Sears and Penney stores have been taken over for warehouse/distribution centers by Amazon.
There is a story behind the Hospital Emergency Room scandals. Better yet, a name. Stephen A. Schwarzman was one of the many $Billionaires spawned by the financialization of the US economy. A man with a nose for making money with money. His own, others’, and the U.S. Government’s. In 2016 Schwarzman’s Blackstone Group bought TeamHealth. TeamHealth is responsible for the egregious out-of-network billings from Emergency Rooms, and the slave labor wages for the Doctors who work in them. Stephen A. Schwarzman is a long-time friend of TFG.
Before TeamHealth, Schwarzman made a fortune in the financialization of housing by buying up houses, throwing on a coat of paint. then renting them out to those who can no longer afford them because of the astronomical prices resulting from the financialization. Results — record homelessness. Because of the financialization of housing; we have people with jobs who are homeless; kids in our schools who are homeless; and several more $Billionaires.
The forensics on the 2007-2008 financial crisis are ongoing. To date, the list of causes is longer than a very tall man’s arm. To date, financialization isn’t on that list. In time, they will no doubt sort it out. Trying not to see makes it slightly more difficult. Meanwhile, the damage from the cataclysmic collapse continues.
In his 12 August, 2005 NYT column, Paul Krugman’s answer to his former Russian émigré neighbor’s query as to how Americans made money was, “by selling each other houses.” The former neighbor was really asking, “how does a financialized economy work?” To which, Krugman could have answered, “by making money off the circulation of money.” Bitcoin, and other cryptocurrencies, must have been listening. There can be little doubt that they had read Sherman McCoy’s wife’s comment in re how he made his money in Tom Wolfe’s ‘Bonfire of the Vanities’. In the case of the ‘Financialized Economy’; will the ending be different?
Somewhere around 2000, Merrill Lynch started churning their customers’ accounts. Did so for them; them being Merrill Lynch, its traders, and shareholders. There were commissions and thus profits to be made buying and selling the customers’ securities. Usually without their knowledge or consent; especially if the customers were elderly. By the time, twenty years later, Merrill was ordered to pay $Millions, the duffers were long dead. Fair to say that Merrill found deregulation and the making of money off money, financialization, tempting. An economic model they were quick to grasp. It was greed that killed Merrill Lynch.
Being really rich is a positive feedback loop. At some point you are literally making money faster than you can give it away; just ask Bill Gates. On January 30, 2022, The Washington Post ran a story about the life of a $Billionaire they called ‘The moral calculations of a billionaire’. This guy is making $6-7Million a day on his stocks/unearned money. Yet, the very rich successfully spend $Millions on Congress types to get their taxes reduced. If this person paid a 50% tax rate on this income, it would still leave him an annual income of $1Billion (25% rate would leave him $1.5Billion/yr). If a working-class family pays a 30% tax rate on their $100k earned income; they are left with $70K for food, clothing, transportation, health insurance, childcare, housing, …, everything. Yet, the media plays the percentage card, the equivalence card. There is no equivalence whatsoever between the two. The very rich guy’s income after taxes is 10,000 times as much as that of the working-class family. If the $Billionaire paid 90% on his unearned income, he would still have $200Million after taxes income. The very rich man’s $1.5Billion after tax income comes out of the National Income. The more taken out by the very rich, the less there is for working class families. So it goes, and goes. The more that goes to the top the less there is for the rest of us. Since the very rich own most of the corporate stocks and bonds, they are the corporate master. It is their votes that keep wages low for working-class Americans, and the cost of healthcare high.
It is the collective influence of the very rich over corporations that has kept the price of COVID vaccines too high for most of the world during this pandemic.
Especially since the 2010 U.S. Supreme Court Citizens United v. FEC decision, we have seen those very rich with more money that they can spend pour money into our nation’s politics. Of late, we have seen a lot of their money go into state and local recall elections where they have no apparent reason, other ideological, for doing so. Turn outs in recall elections are notoriously low, so the threshold. They get a lot of bang for their buck. Besides, after buying several residences and a yacht or two, they don’t have anything else to do with it. They can take down a governor for pocket change; a sheriff, for chump. It is a most undemocratic, this game they are playing.
Boeing, Sears, Penney’s, healthcare, 2008, Merrill Lynch, E.R. Doctors, GE, ENRON, PG&E, increased income and wealth disparity, homelessness, the recent pandemic response, all the recent recall attempts, …, were some of the effects. Deregulation, union-busting, and financialization, in one form or another, in various combinations, were the causes.
Has financialization replaced capitalism? Hard to say given the nebulous nature of capitalism. Was there even ever such a thing as a capitalistic economic model? Did capitalism evolve, or was the rationalization thereof continuously being revised? If capitalism existed, it mostly did so in tandem with the industrial age. Both appear to have ended in the 1970s. Did the end of the industrial age bring about the end of capitalism? Whether capitalism ever existed or not, it no longer does. If it were the guiding hand, it has failed cataclysmically. Good riddance.
Over time, economic models have evolved. With some extensive overlapping; they have evolved from the family unit, to the tribe, to slavery, to feudalism, to mercantilism, to colonialism, then to capitalism. Each one is, in part, a continuation of the one(s) before. In toto, forming a continuum. Each, dictated by those with wealth and power. Seldom, if ever, asking, “How should it be?” “What should a society’s economy do for it?” The capitalism model and the industrial age were inextricably linked. So it was that capitalism’s days were numbered once the industrial age started to become the technological age. For more than 4 decades now, the question has been what is next? From then until now, we have had an opportunity to get it right for a change. So far, as always, those with wealth and power have acted to make sure we don’t take advantage of this opportunity.
If the successor to capitalism is an economic model premised on financialization, as it appears that it is, and, if, in a well functioning economy the requisite goods and services are efficiently produced and equitably distributed whilst all the while giving utmost consideration to human welfare and to the protection of the natural environment; the world is in trouble. Indeed, none of the current economic models are working well; some, hardly at all. What other metric for evaluating an economic model can there possibly be?
Mutual funds had been around since 1924, but it was in the 1980s and 90s that they obtained enough financial clout, began to exert significant power. By then, if you were a corporate CEO, mutual managers likely controlled your board, decided whether or not you got to keep your job. Screw the ‘invisible hand’ crap; they, the mutuals, demanded a certain rate of return or else. Gave us chainsaw Al and Jack Welch. Cost us a lot. A lot of enterprises and utilities were no longer viable by this metric. Changed the US’s industrial, agricultural, public utility, .., landscape forever. Did the mutuals hasten the financialization of the economy, or were they themselves much a part of it? The Latter.
During this same 1980s-1990s period, Leveraged Buy Outs (LBOs), around since the 1950s, began to play a significant role in the US economy. Strictly financial, the buyers often put up less than 1% of the purchase price, then leveraged the balance with a mortgage on the assets of the company being bought out. Who needs capitalism? Nothing epitomized the financialization of the economy more than Michael Milken’s junk bonds. Again, little pictures have big ears; so, too, nascent cryptocurrencies. Bitcoin shouldn’t come as a surprise.
Deregulation certainly enabled and abetted the financialization of the economy. A goodly flow of money, not the production of goods and services as before, is essential to the financialized economy. It is the flow that the financials tap from; taking their cut, so to speak.
Financialization isn’t just skimming, it was a way of having your cake and eat it too. As long as you could keep the cake inflated, the level in the bottle the same, no one would notice. By 2008, the cake was all bubble; the scotch in the bottle was all water. Today’s inflated home prices and the Dow Jones Industrial Average are very much the effects of the financialization of the economy that has occurred over the past four decades.
At a stretch, and with a good bit of mythology thrown in, capitalism as the basis for an economic model lasted several hundred years (more like two hundred-fifty). Financialization as the basis for an economic model will never see a hundred. It is simply too destructive, too inequitable, …,; too incapable of fulfilling the role of an economy. The sooner discarded, the better.
No doubt, there will be those who claim that financialization is but the latest, new improved, version of capitalism. It isn’t. It is much worse. Capitalism was all about a return on wealth; required the production of goods and services. Financialization is about making money off money. Money itself, the product.
For all China’s faults, they do seem to get it that an economic model is something a nation constructs according to what it deems best for itself. Europe has been moving toward thinking along the lines that in a well functioning economy, the requisite goods and services are efficiently produced and equitably distributed whilst all the while giving utmost consideration to human welfare and to the protection of the natural environment. The United States is still in deep denial. Is still coming and going while talking about capitalism, and getting back to then, and ‘being back’ from when, when we should be 80 years ahead of where we are. Rather going forward the past 40+ years, we have gone backward. In the US, the Citizens United decision and financialization, in tandem, have created and sustained a positive feedback loop. Money itself has become the basis for the economy, for our politics.
Boeing, Sears, Penney’s, healthcare, 2008, Merrill Lynch, E.R. Doctors, GE, ENRON, PG&E, increased income and wealth disparity, homelessness, the recent pandemic response, and all the recent recall attempts were disastrous effects of changes made, or the failure to make changes that should have been made, in the economic model. Though they share causes and are strung out over a period of decades; the one most common to them all is the financialization of the economy. These failures, this period, also offer a snapshot of how inextricably economics, politics, and history are linked.
influence of GE @ ~ 22.30