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"Looting of America" Author Sees Opportunity in Meltdown
I've just interviewed Les Leopold, who blames the recent financial disasters on trends that began over 30 years ago, explains how a great deal of Wall Street's "investing" has had as much connection to the real economy as fantasy baseball has to baseball, diagnoses the failures of labor and the left to resist the financialization of the economy, views the current situation with genuine optimism as a rare moment in which we might be able to make necessary changes to regulate finance and to shift money from a tiny group of billionaires to the rest of society, and explains why that latter step is needed to stabilize any economy.
With teach-ins planned everywhere on June 10th and people trying to educate each other on exactly what just happened to trillions of our children's dollars, you could do a lot worse than to gather some friends together, read or listen to, and discuss, this interview, and then take appropriate actions.
Here's the audio in an mp3. It's a little under an hour.
David Swanson interviewing Les Leopold:
DS: This is David Swanson from AfterDowningStreet.org and Democrats.com and elsewhere, and I am very privileged to have here for this recording Les Leopold who has co-founded and directed both the Labor Institute and the Public Health Institute, who helped to form the Blue-Green Alliance which brings labor together with environmental activism, and who is the author of an award-winning biography, The Man Who Hated Work and Loved Labor: The Life and Times of Tony Mazzocchi, and of the book we are going to be talking about this evening, The Looting of America. It’s a long title, but it’s worth it: The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity and What We Can Do About It.
Les, great to have you.
LL: Well, thank you very much, David. I’m very glad to be here.
DS: Thanks for being here. It is a wonderful book. It’s not too long. I greatly enjoyed it, and it explained some crazy-sounding things to me from Wall Street that I had no idea what they could possibly be. Things liked “cubed, collateralized debt obligations,” and so forth. I don’t know if we have time on this, in this interview, for you to explain all the terms to everyone. They can get it from reading The Looting of America, but use your judgment and explain what we need.
But maybe if I could I’d like to start here: There is sort of a basic rule of economics that you say you and others have been taught. That is that when productivity goes up, the workers pay goes up. Not just that it should, but that it does, as some sort of a rule. And yet that hasn’t been true for quite some time. Can you discuss what has happened?
LL: Basically from World War II to the mid-70’s if you look at the productivity index, and we should define productivity – it’s the amount of output per worker hour. And the wealth of nations is basically determined by the value of output per worker hour. The more valuable that worker hour, the greater the prosperity of the nation. So it’s what is beneath pumping up the line of gross domestic product and other things like that. And our standard of living.
The productivity index and the average hourly wage of the non-supervisory production worker (which is something that is tracked in the statistics books, the government statistics books), those two numbers went up virtually in tandem from World War II to the middle of the 1970’s, and the thinking was that as productivity goes up, corporations make more money, they then hire more workers, which drives up the price of labor, and, the real price of labor after you take into account inflation, and as the two go up together, prosperity within your country goes up. And this was one of the reasons American capitalism was such a shining example around the world. The standard of living in the post-World War II period was phenomenal for the average working person, virtually throughout the country. There were exceptions – farm workers, African-American farm workers in the south, etc., - but overall there was a wonderful increase in the standard of living.
Something very strange started to happen in the mid 1970’s that, the two got de-coupled. It was no longer, what we thought was automatic turned out not to be automatic. In fact, there were other factors involved, and productivity continued to rise and, but the average worker’s wage after inflation went flat and started to go down. And this created an enormous change in the American economy, because the gap between those two lines first was hundreds of billions of dollars and now trillions of dollars, and that money had to go somewhere. It was no longer going to the average working person. In fact, it went to the very, very top of the income ladder. And that’s the source of our current crisis. A huge amount of money going to a very few people at the top.
DS: Now that seems relevant and interesting and disturbing and maybe even offensive, but I’m not sure it’s going to be clear to everybody right away how that 30-year trend could have caused the recent financial disaster. What’s the connection?
LL: It wasn’t clear to me either. And your listener or reader should be skeptical. So what. The money goes to the top, and the theory was when the money goes to the elite - and this was sort of the theory of the deregulatory, Reaganomics era – it started actually with Jimmy Carter, deregulation started then and some other trends we’ll talk about in a minute – but the theory was that the investor class, the elite, would be the investor class, and they would take that money and they would plough it back into new industries and this would lead to, you know, even more growth and productivity, even more jobs, even higher standard of living. And up to a point, that’s true. But there was so much money that floated to the top that there actually, the amount of investments that could be found that were moderate, you know, that were relatively good, solid investments began to get used up.
And the “Wall Street Journal” refers to a “wall of money” that existed out there that was looking for investments. And that wall of money, you could only buy, look, you could only invest so much, you could only spend so much on yourself. I mean, how many homes, how many cars, etc. The rest of it was still seeking investment opportunities. And Wall Street is not stupid. They became very aware that there were literally trillions of dollars out there seeking a home. And they came up with it.
They invented financial instruments to meet that demand. And the instruments they created are so amazing it would take, it took a book to kind of unwind it all, but they are so phenomenally detached from reality, they literally became a series of bets. And those chickens finally came home to roost on a lot of those bets. That’s the third piece of it.
So the first piece was the productivity got detached from real wages. Money drifted to the top, and those people ran out of places to invest it and they start to invest in what I call “vanity finance.”
DS: Can we stop at step two for a minute because I don’t know if that’s going to be clear to everybody right away. I don’t know if it’s clear to me. You say in the book as well, there’s a line on p. 17 that stopped me when I read it that says: “There was so much money roaming the globe that it ran out of real economy investments. Instead, much of this massive surplus found its way into high finance.”
And yet, we’re trained, I think, to think of entrepreneurs and the investing class as driving innovation. Why some handful of these people 30 years ago couldn’t have thought to create investments in infrastructure or in green jobs in better schools or in mass transit. What prevented the creation of real economy investment?
LL: That’s a good question. But some of the things that you mention there are public real investments. That’s not what, you don’t invest in infrastructure and schools, education if you are a private investor. And you’re also not likely to be able to by yourself break through on clean energy. That usually, you know, those, or alternative energy operations. That usually requires massive government investment.
What you’re looking for as a private investor is a good investment and you’ll be willing to speculate some on venture capital, and money did go there. In fact, the dotcom boom was fueled precisely by the money that was looking for a home.
But there was too much of it. You can only absorb in the private sector a certain amount of investment at a time. Otherwise it gets very, very risky, and if it’s your money, that’s not what you want to do. What you want is something that looks much safer, or at least moderately safe.
And so that financial instruments created by the financial community looked a lot safer. So, yeah, you put some money into new industries, into the dotcom boom, into securitized subprime mortgages as well, and then you start drifting into securities based on subprime mortgages that were designed to look like they were AAA-rated securities. That money, those kind of instruments attracted a whole lot of money.
Where that money could have gone, could have, should have gone, is precisely in infrastructure investment, education, energy, health care reform, but that’s what the public sector is supposed to do. And the public, if you recall, taxes were dramatically cut, especially on the wealthy, so the money to do those wonderful investments wasn’t there.
DS: So these investors who were looking for a safer place than risky new energy technologies or schools or things that tend to be public investments found investments that they thought were relatively safe but perhaps were not, were concocted with some fudging of numbers and some tricks and some fancy footwork that’s discussed in your book, The Looting of America, that perhaps in the way that some victims of predatory mortgage loans were taken in, the highest level of investors were taken in. Am I reading that correctly?
LL: It’s amazing, virtually everybody involved was taken in except the people who were, even the people actually who were marketing this stuff. See, the money is made by creating, packaging, selling, and reselling these instruments. The fees are embedded in it, so you make the money up front. And this was incredibly lucrative for the financial community.
Step by step the large financial institutions started making money hand over fist off the fees that these things generated, and as long as the economy was booming, especially the housing market going up and up and up, which turned out to be that which was being bet upon mostly during this period, but other things as well, as long as these things went up there was little chance of people losing their money, and the fees being made were enormous. The profits of the financial sector started to hog, became the most profitable sector of the economy, and it, I think at one point it almost hit 40 percent of all the corporate profits were in the financial community.
But it turns out as we’re learning now, these profits were phony. For example, the nine largest financial institutions had, according to the New York times, in the three years prior to the crash this fall, had earned quote/unquote 300 billion dollars. And now they’ve lost all that. It’s all gone. Except it was paid out. In other words, those companies are now, have now gone in the red equal to all the money they previously made. Of course, the money they previously made has already been paid out, half of which has gone to, you know, bonuses and salaries within those companies. And we’re now making up the difference through the TARP program, and trying to salvage the economy from a great depression.
So, but it was phenomenally successful as it was going on. And the reason that the investors invested in these instruments was (1) that they had these good ratings and they paid a little bit more than, they were constructed that they paid a little bit more than a super-safe government investment, or comparable government bond. And when you’ve got a lot of money and you can make a half a percent more, you’re making a lot more money.
LL: They couldn’t sell them fast enough. And they kept inventing new ways to create them, even when there were no underlying assets that were attached to them, which is, you know, a mind-blowing concept that I ran into as I was working on this book.
DS: Right. Investing in bets on investments actually owned by completely other people. I mean, these layers of phoniness so that this is not an economy in any way connected to the production of actual valuable products or services. Explain to people why this phony, fantasy finance economy couldn’t simply be allowed to fail without actually worsening the real economy.
LL: Well, I need to give a, maybe, let me try to explain a little bit more how these instruments work by going to the analogy of fantasy sports, fantasy baseball.
LL: Because it’s a, fantasy baseball is a synthetic derivative. In fantasy baseball, you and 12 other people get together and form a league and you draft real baseball players onto your team and you get ranked by how many home runs, RBIs, stolen bases, etc., your team has. And you own players, but you don’t really own them. The person, the real major league baseball player, if I have Derek Jeter on my team, Derek Jeter doesn’t know he’s on my team. In fact, he’s probably on a couple of thousand or 15,000, or 20,000 fantasy baseball teams right this very moment. Nobody owns him other than the New York Yankees, but he’s part of all these fantasy leagues.
And there is betting taking place right in these various leagues. The winner gets a certain amount of money, second place gets a certain amount of money. And money will exchange hands at the end of the year, and there are books that you can buy based on, you know, how to play fantasy baseball. There are stat services that track this every day for the teams involved. So there’s a whole enterprise surrounding fantasy baseball, which is all, it’s a game based on owning real players but you don’t really own them. You just track their statistics. Your team is derived, a derivative, a synthetic one, based on real major league baseball.
Well, imagine the same thing based on housing. And you can play, you can do the same thing. You can make all kinds of bets, and you can own all kinds of housing without actually owning it. You can play fantasy housing bets. And that all works really fine, except let’s go back to real baseball. What happens in fantasy baseball if the real major leagues go on strike? If the real thing has a problem and goes on strike, all the fantasy baseball leagues collapse, entirely. They are worth nothing. You can’t play. You can’t do anything. All the books and stats services collapse. They all go under, because they are built like a pyramid on top of the real thing.
Well, the same thing happened in housing. The housing market that all these bets, these betting leagues were based upon, all these fantasy finance securities were based upon, hit a limit. At a certain point prices couldn’t go up any more and they started to go down. It was the equivalent of going on strike. And when they did start to go down, all these betting leagues, securities that were based on it in the superstructure, just like fantasy baseball, all those instruments started to crash in value. And when they crashed, everything around it started crashing, and you had an enormous implosion of financial worth.
There is a school system, there are five school systems in the Milwaukee area that got snookered into buying $200 million worth of these fantasy finance securities. Kenosha, for example, spent $37 million, and they were doing this to try to raise money for a retiree benefit fund. And that $37 million when the crash took place is now worth, in one year it went from $37 million to under $1 million. That’s how far it crashed, the fantasy finances had crashed. And this is what happened all over the globe.
Now, your question is, why couldn’t we let this happen? Well, if we just let, here’s the situation we were in: The banks had not only created and sold these fantasy finance instruments, but they kept a lot of them as well. The ones they couldn’t sell they kept on their books because they looked very valuable. Other people wanted them. And so, and they had these offshore, off-book connections where they set up these things in the Cayman Islands, these separate little corporations that were basically where the game was being played. They had those, too.
Well, once the crash started, their books were littered with these valueless, if they sold them they would be worth the same thing as the Kenosha school system. They would go from $37 million to less than $1 million. And then if, if they did this, then the bank itself would be insolvent. It would go under. It would have to file for bankruptcy which is kind of what happened, which is exactly what happened to Bear Stearns and it was merged away and then it happened to Lehman Bros., and the markets all over the world started to collapse.
And it was about to happen to AIG. And I’ve got to tell that story because then you’ll see what would happen if we let it collapse.
LL: AIG decided that what it was going to do was insure other people’s bets. In other words, it would be like if I had a fantasy baseball team and it would say, OK, we’re gonna, if you finish in the bottom two out of 12, we’ll make up the difference. We’ll provide insurance, financial insurance for you. And you’ll pay us a certain amount four times a year and a certain amount up front and we’ll get those fees and if something goes wrong with your team, we’ll insure it.
Well, they figured if they insured enough different teams, enough different speculative securities, they couldn’t all go south at the same time. So they would, so they decided to insure more and more. And they figured out that this was a gold mine, because they had a AAA rating themselves, and as a result, in their contracts, their insurance contracts (they don’t call it insurance because that would be illegal, that’s regulated; they call them credit default swaps, that’s not regulated – still not regulated), so they issued these insurance policies basically on these risky financial securities. And they figured, we’ll do enough of them and we’ll make a huge amount of money because we don’t have to put up anything in return. We have a AAA rating, we will get all these fees, this was the most profitable of any of the divisions within AIG. They were going to get all these fees without putting up anything in return. Cost them almost nothing.
So they issued $450 billion worth of insurance. Well, when the economy started to go down, the housing market collapsed, and these various fantasy finance instruments started to get into trouble, they had to quickly come up with money to cover their bets. Well, very quickly they didn’t have enough money, and once they didn’t have enough money, their rating agencies were about to switch their rating from, or did switch their rating away from AAA which meant that the people who were on the other side of the bets were allowed to then take their assets, or AIG had to quickly sell the assets.
Now, if AIG, AIG didn’t have, couldn’t possibly raise enough money in time, and no one is going to lend them any money, so they would have gone under. If they went under, and they were about to go under, they would have owed $450 billion to all these other financial institutions all over the world. Had they not paid their bets, those institutions would have gone under. Those institutions also did the same thing. They had bets to other institutions. They wouldn’t have been able to pay off their bets. And you would have seen a domino situation right around the globe.
We were a millisecond away from that massive meltdown, and, you know, whatever criticisms I may have of how it was done and what, you know, the various administrations were up to, the Bush administration in the end, had they not acted on AIG, we’d be selling pencils on the street right now. It would be a disaster. Bank after bank after bank after bank would have folded.
DS: And not just banks but school districts and pension funds, and . . .
LL: Oh, all kinds, everybody that took out insurance would now be insolvent or close to being insolvent. You would have had a massive crash. I mean, it was bad enough as it is, but it would have been, I think, by a factor of ten times worse. JP Morgan would have gone under, I believe. You know, a lot of the other Wall Street firms would have gone under because they were counting on that insurance. Uh, anyway, so . .
DS: And this would have impacted real people in the real economy.
LL: That’s another thing I think that needs to be better understood. People kind of view the finance community as another sector. It’s not another sector. It’s the kind of the heart and lungs of the economy. It breathes. It’s everywhere. Uh, virtually every single financial institution, school district even, rely on financing, on a periodic basis or on a daily basis. Every aspect of the economy relies on . . . The way I like to picture it is, imagine the globe. On the surface of the globe is real production. The air is finance. You need a certain, you need the right amount of air for the real economy on the surface of the globe to prosper, and if the air gets too thin or it gets too stormy, you have, all hell breaks loose on the surface of the globe.
And what happened was, once these institutions started to fail and the values started to crash and these fantasy finance instruments that were, you know, based on not much more than fantasy baseball, once the crash took place, the strike took place, as it were, you had an implosion of credit problems. Banks were afraid to lend to each other, for starters, because, think about it. They knew how much toxic, how many toxic assets they had on their books. They knew every other bank had toxic assets on their books, and they knew how close they were to going under. They’re not going to give money to another bank that is also about to go under. They needed their own capital to be able to stay solvent. So bank after bank after bank after bank held onto their money.
The money market funds froze up. And money market funds are absolutely invaluable because that’s what corporations use to make payroll. They depend on selling paper for 30 or overnight or for 30 days and then rolling it again and again and again. They use that money to make payroll and they use their earnings for higher return investments in their company and elsewhere.
So all of that started to freeze up. And once the credit system freezes up, the economy, when they talk about the economy falling off the cliff, that’s what happens. It just stops functioning. It starts sputtering. People can’t get credit to buy things. Companies can’t get credit to buy things. Then the people that are waiting to sell things can’t sell them. They start laying off people. Everybody starts laying off people. Everybody stops buying things as well, and you get a downward spiral, a deflationary spiral.
This is what happened after 1929, after the crash then, and it was mismanaged as well at that time by the federal government in the Hoover administration, or so the literature suggests. But anyway, once that credit freeze starts going into the real economy, you get a dramatic, instantaneous recession. I mean GM and the Big Three auto companies would have problems anyway, but nothing like what they are facing now. I mean Toyota, everybody is seeing, witnessing a humongous drop in sales. That’s not because all of a sudden people got poor. It’s because the credit system froze up. And when it freezes the entire economy in a sense comes to a halt just long enough to cause chaos, and it’s happening on a global level. Virtually no country is immune.
DS: And I think we should make clear, as your book does, I think, if I’m reading it right, that the world of finance out there in the atmosphere doesn’t just impact the real world and the real economy when and if it collapses, but is for better and worse and often for worse interacting with the real economy all along and in many ways driving us to the cliff that we then are in the position of being about to fall off. And so, in regards to the housing market that you suggested was central to this, and you said that the housing market hit a limit. It was interesting in reading your book and others that in some ways the housing market was driven to that limit by the world of finance.
So, you know, I used to work with a community group called ACORN, and we would try to prevent predatory loans, and eventually we got to the point of trying to hold accountable the companies that were buying the predatory loans, and so I sort of viewed it from that direction, in that sequence, and yet in some ways it may have gone the other way – that the people throwing all this money around to buy these securitized packages of reshaped predatory loans were driving the creation of more and more and more of these subprime loans out there.
LL: You’re absolutely right. Think about it this way. Very interesting phenomenon occurred. Remember we talked about the productivity kept going up and wages didn’t go up?
LL: Well, the response, both of the financial community and by the average consumer, was to take on more debt. The average ratio up until the splitting of the two lines was about 60 cents on the dollar. Every dollar you earned, on average, people had about 60 cents in debt. Well, as wages stopped going up and some of this fabulous wealth of the super rich got recycled back to consumers in the form of debt - credit card debt, mortgage debt, car loans, student loans, on and on and on. Well, the ratio went from 60 cents on a dollar to $1.20 per dollar! It doubled. Virtually the debt load on the average consumer doubled.
DS: Borrowing what we had earned had our pay been based on productivity.
LL: Well, there’s a limit to how much debt a consumer can take on. There’s just a limit. You know, at some point you can’t service the debt. And that means if your indebtedness was driving up, let’s say, the housing market, and everybody was thinking, “Well, if I get into trouble, prices are going up, I’ll sell my house and I’ll still be able to pay off my debt,” at some point it isn’t going to work any more. I mean, it’s obvious it wasn’t going to work anymore.
If you look at the price of houses, it followed, housing prices followed gross domestic product almost exactly until about six, seven, eight years ago, and then it shot up like a rocket, straight up, had no connection any more to gross domestic product. You know, that couldn’t last.
But, you know what, I don’t want the listener to get a misconception. You could take all the subprime mortgages that happened and all the predatory lending, you could take that entire problem and all it all up, and at most it is a $300 billion dollar problem. You could pay off everybody’s mortgage and clean up that problem for about $300 billion.
DS: And that’s two percent of household net worth, you say in the book.
DS: Two percent, so . . .
LL: But that wasn’t the problem. The problem was that they basically sold, securitized, those same subprime mortgages again and again and again. It was like selling the Brooklyn Bridge over and over and over again. So that $300 billion turned into $1.2, $1.5 trillion of toxic waste and not it’s scattered all over the place.
That’s, when the TARP money had to be used it wasn’t to take care of the subprime mortgages, it was to take care of all that, to try to deal with all those toxic assets. They’re still trying to figure out how to deal with the toxic assets. It’s such a thorny problem. Because . . .
LL: . . . nobody wants to realize the losses on those things. So we, with the selling of it again and again. Look, it became, funny thing was, it’s true that the market for subprime mortgages was driven by the financial community, not by, you know, a conveyor belt was set up. They wanted those subprime mortgages as fast as possible to package and make the huge fees and sell to investors. But, you know what, that got to be too much of a pain in the butt. So the figured out how to do that without ever even owning the mortgages. Because to get title to a thousand mortgages and put them in a pool and do all the fancy things they did became too time consuming. So they invented a way to do it without owning them at all. That’s called synthetic. And that’s how they created synthetic collateralized debt obligations. That’s where it got to be like fantasy baseball.
They just created new securities that were tracking subprime mortgages without owning subprime mortgages.
LL: And people bought them and they had value and they borrowed money against them as well. So you started to have a pyramid of mortgages based on nothing and then loans taken out against those mortgages that are based on nothing. So even a small hiccup in the actual housing market below would cause a cascading set of problems.
DS: So the actual problem in the housing market is $300 billion. Here we are having shelled out trillions with a “T” of our children’s money with no end in sight, and the problem is still there. So, as I think you explain extremely well in the book The Looting of America, it wasn’t just, this can’t be just blamed on poor people who bought too big a house.
LL: Oh, god, yeah. That’s what I think folks would, you know, like, Wall Street would probably like us to believe that, but I, I actually think that those people who are watching this thing know better. And what the fundamental problem comes down to is the financial free markets left to their own devices, in other words, pure, free market financial capitalism left to its own devices doesn’t work. It will crash.
We are witnessing a real time experiment in what happens when we deregulate high finance and let it go do its own thing. Left to its own devices, sooner or later it’s going to create fantasy finance instruments because it’s profitable to do so. We broke down, starting in the 70’s, we started to get rid of as many controls, all the New Deal controls virtually were undermined or eliminated in the 70s and 80s and right on through the 90s.
And attempts to regulate these instruments were actually beaten back. Phil Gramm did a masterful job in passing legislation, it wasn’t actually signed, that made it illegal to regulate the credit default swap market, this illegal, this insurance that we described.
By the way, the reason, if it was called insurance it would never be allowed, is in the insurance industry you have to have a material interest, well, a couple of things. You have to have real assets to cover your insurance policies if you are an insurance company. And second of all, there has to be a tangible interest. You can’t insure your neighbor’s house if you don’t own your neighbor’s house. And thirdly, 10,000 people can’t insure your neighbor’s house, because the insurance company knows if you do stuff like that, well, the temptation to burn down your neighbor’s house, have a suspicious fire there, goes up because there are a lot of people betting on it to go down.
Right now, 10,000 people can bet on the demise of GM. No problem. There are more than 10,000 people who will bet on the demise of GM. It’s OK to do that and totally unregulated.
But anyway, the, this is the result, this game, this casino . . . Historically, one of the things I found fascinating is the idea of finance, high finance being a casino is something that has been discussed for the last 200 years. There has always been a question of, “How do you get finance to do what it needs to do in the economy without it turning into a casino? How do you separate the utility that it provides from the speculation and gambling? Where is the line? How do you do it?” Very difficult to do, and we tried, now we’ve just tried an experiment in virtually total deregulation and it was an unmitigated disaster. That’s the lesson we have to learn here.
DS: And the . . .
LL: You can’t rely on the free market to police itself.
DS: And all of those bets on the demise of GM, there clearly is some acceptance among some elites in this country of the possibility of the demise of GM, did anyone bet on the demise of AIG?
LL: Probably. But you know, we won’t know because the settlements take place after the bankruptcy. That’s when the money gets totaled up, the best on both sides. And a lot of them wash out.
LL: And a lot of people bet both ways, whether they went, you know, long on the stock and they used the credit default swap to go short, you know, that kind of stuff. So you don’t know how it all, how much with AIG.
I suspect that, and I haven’t tried to do this . . . I did it with GM. You could actually, if you Google, you can get the price of a credit default swap for GM. The last time I looked it was something like, you had to cover $10 million worth of bonds you had to pay, for insuring it, you had to pay $8 up front and then some phenomenal amount of money.
LL: My guess is there’s something similar with AIG. If you want it, someone will sell it to you.
DS: So, this craziness, in this conversation you’re citing deregulation and you do in the book, too, and you propose a Financial Produce Safety Commission that would actually ban products that do no good and do harm, these crazy instruments we’re talking about, but the impression I get from reading the book is that you don’t think we could ever regulate sufficiently to count on avoiding a repetition, and that in fact we should be charging for financing disaster insurance – a sort of tax on . . .
LL: I’ll take it one step further. I’m not convinced that we have the wherewithal, let’s put it this way: We now, we now know that when these financial institutions get large enough we can’t let them fail. I mean, there are people out there that say, “Oh, let them go down. Let them go under.”, etc., you know. They would have loved to let them go under, but, you know, we’d be in a great depression if we let them go under.
Not like, in fact it’s not like letting any real company quote/unquote go under. It’s like, you know, suffocating a huge, you know, a huge piece of everybody’s economy when you let these big things go under.
So what do you do with them? Some people say, “Well, you should break them up into smaller entities.” Well, you know, I wonder if you can really get away with doing that. I’m wondering whether ultimately they have to be regulated like a public utility. That they have to be, you have to literally regulate it. I’m not saying the government necessarily has to own it lock, stock, and barrel, but you have to regulate it for the public good. That the idea of letting these folks just, you know, pay themselves whatever they want to pay themselves, go in whatever business they want to go into, create whatever insurance they want to create, those days have to be behind us.
The financial disaster insurance is, I’m basically making the argument that two things have, maybe I did it kind of klutzily in the book, but simply put, I think I did this properly at the end of one of the chapters, two things have to happen: we have to move money from the financial sector, the bloated financial sector into the real economy, and we have to move money from the top of the income ladder, the tippy, tippy top, to the middle class and working people and the poor. Those are the two most important things that need to happen to stabilize the economy.
Every time we’ve let money drift up to the top, in a very short period of time you go into a major depression. That’s what happened in the 20s and it’s happened again now. A disaster. And there’s no . . . one way to move money from the financial sector into the rest of the economy is to put a very small fee or tax (I call it insurance) on every single financial transaction. So if people want to zing money all over the world in a hurry like every nanosecond, they’ve got to pay a little bit into the fund. They want to do all these credit default swaps, or if we regulate them they’ll come up with another way to do these kinds of transactions and bets of one kind or another or currency bets or whatever they want to do – every time you do, 0.3 of one percent of the value of the transaction goes into, you know, the public sector. It pays us back for all the money we put in now and it protects us the next time around, and it helps move money from the financial sector into the real economy.
There is no reason in the world why we should ever let a financial executive make, you know, $10, $20, $30, $50, $100, $200 million dollars for pushing money around. I mean, it’s been proven now that what they did had no social utility, and we’re bailing them out. Now. Yet, all that, there’s just no economic reason ever to pay people that much money for doing that kind of work. It has to stop. And the sooner we get there, the better.
DS: Well, I love Sam Pizzigati’s idea of a maximum wage and even tying it to a minimum wage, and you mention such things in the book as well as raising the minimum wage and permitting re-unionization with the Employee Free Choice Act, creating single-payer health coverage, using progressive taxation, etc. I mean, these seem like the standard left positions, but you’re making an argument that all of these are needed to avoid financial disaster.
LL: Yeah. I don’t have to make this argument. As a matter of fact, Sam is more radical than I am on this.
DS: He is, and I agree with him, but . . .
LL: I’m saying we don’t even have to think about doing this outside the financial sector. If we just capped wages in the financial sector . . .
LL: . . . president’s wage cap. To any institution that receives federal money or federal support. That would be an incredible signal for people, you know, to start going into other professions. If you want to, you know, earn a decent living don’t keep thinking that, you know, you’re going to graduate from college and in three years you’re going to be making a million dollars. I mean, . . .
And then the system crashes and we have to bail out your institution. That doesn’t seem like a very smart thing, smart way to run your country.
So, I’m willing . .
DS: So in the financial sector we cap salaries at the salary of the US president, and I would add to that that we limit radical increases of the salary of the US president because I wouldn’t put that past anybody.
LL: Well, that would be very interesting. But I, the point being is we’re not talking about radical conservative here. We’re talking about do you want the system to operate, or do you want it to continually crash. That, you’ve got to prove to me that you have another way to stop, I think that the burden of proof is now on the free marketers and the partial regulators. You’ve got to prove to me that we’re not going to, it’s not going to, they’re not going to work their way right around those regulations and we’re going to be into, move into another crash.
The sector is too big and there is too much money at the top of the income scale. Until we do something about those two things, and if you don’t like the proposals that I’ve put forward then come up with your own, but until we move money from the financial sector to the real economy, from the top to the middle and the bottom, and the tippy top. I don’t care about, you know, people making, you know $500,000 a year. I’m not even concerned. I’m talking about, you know, $10, $20, $30, $50, $500 million. I’m talking about billionaires. It’s obscene to let that go on and it’s not obscene just from a moral point of view. It is dangerous, absolutely dangerous to our economy to allow that to happen.
And, look it’s happened twice in 70 years, and with the interconnected global economy as it now stands, you know, it doesn’t take much to disrupt it. If we’re going to keep letting it happen it’s going to happen again with more severity. And we’re not out of this one yet. We don’t really know how we’re going to pay it all back.
DS: And I would just add I think it is as dangerous to our representative democracy as it is to the economy, and I think your book lays out an incredible vision and a wide range of systemic reforms that I’m wondering if there’s anything you see on the horizon at the moment. Have there been any bills introduced, are there any proposals that have the beginnings of any sort of legs that you would encourage people to support.
LL: Well, you know, there was talk of wage caps on Wall Street. But, you know, the Obama administration is very reluctant to do it. Congress is pushing harder. You know, there’s talk about dramatically limiting some of these derivatives. Actually there’s talk about product safety stuff, but, you know, there are loopholes in it.
What’s missing now which makes me a little, which makes me worry, is not what the Obama administration is doing because they are trying to do something. What worries me is that there is no articulate voice outside the administration that is calling for dramatic change. There is a line from the Roosevelt administration where, it goes something like: some progressive labor people came in and made all these demands . . .
DS: A. Philip Randolph.
LL: Was it A. Philip Randolph?
LL: And Roosevelt told him, “OK. Go out there and make me do it.”
LL: Well, that’s what has to happen. If there is no pressure coming, there’s some coming from the Congress, but there’s no, what’s missing now, for example, is a labor movement that has an articulated alternative vision that had popular support that could say, “Look. These are the things that have to happen now.” Everyone is kind of relying on Obama to do it for them, and I don’t think that’s possible unless the spectrum of debate changes.
What I fear most happening now is a certain kind of financial amnesia is going to set in. We’re going to forget how we got here, and we’re going to look at the problems at GM, and the right is going to come in and start blaming Fanny and Freddie, and they’re going to blame big government, and it’s going to get to be a muddle. And that’s what happens when you don’t have, you know, popular organizations. In fact, there’s really no left, at least that I can see, that is laying out an alternative platform.
Actually, one of my critiques of the left is, at least large swaths of it, just ignored the financial sector. You know, it was all about bosses and workers in the real economy and kind of finance, finance was kind of like another sector off to the side.
But anyway, something needs to, some kind of popular, for us not to, you know, go through all these things again and again we’re going to have to see an alternative vision get put forth on the popular level so that there’s pressure on Obama not to cave into, you know, what . . .
DS: ... people who paid for his campaign want. The, I want to let you go, but there are a couple of quick questions on this point. There’s a sort of an ad hoc, grassroots coalition put together called A New Way Forward with a web site http://www.anewwayforward.org In their list of proposals, you know, is sort of general themes and there’s good overlap with your proposals, and if I’m correctly informed you’re going to be speaking at one of the events. They are organizing events everywhere on June 10. Is this a good tool to try to enlarge and move forward.
LL: Sure. I’m for anybody trying to, you know, if they can pull it off and attract people to it, that would be fantastic. Becomes a great place for a dialogue, a great place to develop a deeper, broader understanding of how we got here so we don’t forget, and how we, you know, where we want to go in the future. Yeah, that’s a nice formation.
I kind of wish that the larger institutions - environment, labor and others – saw the need to also participate more fully in this kind of thing, but you know, it’s relatively early, so let’s see how it unfolds. I wish them all the best. I’m going to do what I can to support them.
DS: I think you’re absolutely right, and my hope, of course, is that people will go to these teach-ins and organize more of them on June 10 and then reach out to labor unions they are part of and other groups they are part of and create a bigger movement. And there is at http://www.anewwayforward.org a nice little video that people can show at these teach-ins that goes into some of these issues, but I would strongly recommend that between now and June 10th people get copies of The Looting of America by Les Leopold and then discuss it at these teach-ins on June 10.
Let me just ask you about two pieces of legislation before I let you go because I do know of a couple of bills that seem at least tangentially to address what we’re talking about here. We haven’t talked a lot about the Federal Reserve, but, you know, more of, you know, the biggest chunk of this money that has been handed out in these bailouts has gone through the Federal Reserve, and yet Congress isn’t allowed to see what’s happening there, even though it is public money, and so there’s a bill that, at this point has some Democratic support but more Republican support that’s called the Federal Reserve Transparency Act. It has about 180 co-sponsors and, you know, you only need 218 to pass a bill. Is that a good . . .
LL: Look, transparency is obviously a good thing. You know, the American people can’t be in the dark. It’s kind of interesting that you’re saying that, the Republicans obviously think this is a kind of a wedge issue that they can embarrass the Obama administration with. I support it but not, you know, for that reason.
DS: Well, of course.
LL: We need transparency. That’s a good thing.
DS: The other one – there are a number of bills, and the strongest one may be Sen. Bernie Sanders’ bill, but on the question of usury, of, you know, traditions that date back for millennia, of not allowing lenders to lend at exorbitant rates. And Sen. Sanders’ bill would cap the interest rates on credit cards and so forth at 15 percent. Now, I don’t know . . . there may be some argument out there that people can only do good business if they can charge 20 or 30 or 500 percent interest, but I, I don’t grasp that. What do you think of those sorts of . . .
LL: Give it at try. I mean, at this point, it seems to me all the free market arguments, there are dozens of free market arguments I believe that would say why it is that you shouldn’t cap interest rates.
DS: But they were in the past, right? We have tried it and it worked better?
LL: Well, nothing has worked worse than what we just went through.
LL: So, I’m for, again, I think the burden of proof goes the other way. I say, “Try it.” The argument is going to be, you know, credit will dry up, etc. I go, “So what?” Credit will dry up, you know, consumer credit, predatory consumer credit will dry up a little bit more.
I’m with Bernie on this when I say, “Give it a shot.” There is a long history. This history is 5,000 years old and then some about how to deal with basically predatory lending, you know, high usury. It’s been an issue for 5,000 years. It’s very, very difficult. Doesn’t seem to go away. So I think it’s a very good period in which to experiment.
You don’t get these opportunities that often. I feel like I’ve been unshackled from sort of an ideological post that had both my arms wrapped around it and tied behind my back. You know, you couldn’t, the free market was, you know, in finance with miracle workers, you know, the people that were making all this money were donating it here and there and were viewed as gods. You know, you’re supposed to, like, you know, worship them. And it turns out that what they were doing was running a high class casino that went bust. And now we can talk about what really went on which is those markets don’t work that way, so if we want to try to put a cap on interest rates, usurious interest rates, let’s give it a shot.
DS: Well, that is a wonderful, optimistic note to end on the account of what does not seem a very optimistic story, and so I think it’s wonderful to see this as a time of hope for more fundamental change. And I think this story is told as well as I’ve seen it anywhere else in the book of our guest.
We’ve been speaking with Les Leopold. The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity and What We Can Do About It from Chelsea Green Publishing and you can get it anywhere online or at your local book stores.
Les, thank you very much for taking so much time with us.
LL: Oh, it’s my pleasure and thank you for all the wonderful work you’re doing. You’re a terrific writer and commentator and I wish you all the best.
DS: Thanks for that.
Financial Fiasco Teach-Ins on June 10th
How did we get here? What has the government done so far? What should our economy look like?
A New Way Forward is encouraging people to hold "teach ins", video screenings on June 10th! Go here!
Here's a terrific 35 minute video to download and show at home (or at the public library or other event location).
Read Fantasy Finance and Real Fixes.
Interview transcribed by Linda Swanson.