Yesterday, monotonist Ben Stein offered Easter economic reassurance on the CBS Morning News and called for regulation of hedge funds in The New York Times. Ceding that the markets, mortgages, bonds, and short-term securities are in crisis, Stein claimed that the "real-world economy is not bad." The real world begs to differ, and some have said that the buck doesn't stop with hedge funds, but that the current crisis can be traced to Reagan, Bush, and years of wealth consolidation among the richest few.
Stein said we are not technically in a recession, at least by the National Bureau of Economic Research standards, which define recession as two consecutive periods of economic decline. We'll know by summertime whether this counts as recession.
"There is, however, a serious disconnect when we move over to the world of the financial markets, where chaos reigns," Stein said. Securitized mortgages, municipal bonds, muni- and corporate-auction short-term securities are all in jeopardy, which is all nothing new.
What's new is that "hedge funds and the changing of Wall Street from a financing entity to a market manipulation entity." Hedge funds, Stein explains, "have so much money and so much selling power that they can do what capitalists really want and love to do: to make money not by betting on the markets, but by controlling the markets, by putting so much sell side (and occasionally buy side) firepower in play that they know they will move the markets."
UC Davis Economist Fred Block wrote in Dissent that hedge funds are so incredibly off-the-chain because of economic policies pushed by Reagan and the Bushes.
Starting in 1981, Ronald Reagan set out to deliver on two major changes that he had promised his business supporters. He significantly rolled back government regulation of the financial sector, allowing banks and other financial firms much greater latitude to do as they wanted. ... At the same time, Reagan cut taxes for the very rich, a policy initiative that was replicated by George W. Bush. Taken together, these steps facilitated a dramatic shift of income to the very rich. According to one respected study, the percentage of income earned by the top 1 percent of households doubled from 8 percent to 16 percent between 1980 and 2004.
As the rich grew wealthier, they invested growing amounts in hedge funds that pursued risky strategies to earn annual returns that were far higher than those available for ordinary investments such as the stock market or real estate. The government never regulated these funds because they were closed to most people; one had to exceed a certain wealth threshold to play. The theory was that these already rich investors could cope if these highly speculative investments turned bad. ...As hedge funds grew increasingly successful, they produced rate of return envy among established financial institutions. Pension funds, for example, wanted a piece of the higher return action and started putting some of their money into these unregulated funds. The big investment banks, similarly besotted with envy started imitating the strategies pioneered by the hedge funds. Many of them, like Bear Stearns, were even allowed to create their own hedge funds. Ever more money flowed into the highly risky investment strategies initially popularized by the hedge funds.
Enter the subprime crisis. In the 1990s, mortgage brokers began acting "like the local pawn shop" by charging high interest on loans to those desperate for a mortgage. Bankers then bundled these loans for sale to various hedge funds. Hedge funds began doubling, tripling, almost quadrupling their returns. That is, until the housing bubble burst, as all bubbles do, and people began to default on their mortgages. Soon there was no money coming in and no one to purchase the foreclosed homes.
And here we are. So while Ben Stein won't concede that the manner in which Reagan and Bush fomented the consolidation of wealth and let regulations lapse are to blame for this mess, he does feel sure enough to say that the only truly weak sector in our economy is housing. "Agriculture, minerals extraction and refining, and almost all exports are startlingly strong. In other words, the real-world economy of the nation is not bad."
Maybe I don't live in the "real world?" Sadly, I think I do.
Can Stein really claim that the economic troubles are not reaching average Americans? We all know that Wall Street is in jeopardy and just today The New York Times reported that "Last year, the finance industry was responsible for nearly a third of all wages earned in the city, the highest in modern times. And each Wall Street job supports three workers in other sectors." That's quite the ripple.
And who could forget the ever-rising price of oil, putting a strain on individuals' pockets from sea to shining sea? Despite high profit margins by big oil companies and threats to cut production at refineries whose profits are unacceptably low, the price of oil is hurting individuals, families, and labor. This morning the local Philadelphia news reported that truckers, incapacited by $4.00/gal diesel prices, are floating the idea of a strike, and a strike by American Axle & Manufacturing Holdings Corp. has led Canadian auto-parts supplier Martinrea International Inc. to lay off 550 workers and has forced all or part of 30 GM plants across North America to close.
And on and on and on. While reassurances are more welcome than ever these days, let's target the policies, industries, and abuses that are actually causing this current financial mess -- Reaganomics, unregulated markets, consolidation of wealth, an oil industry held in thrall by big corporations and a surprisingly inconvenient war. Otherwise, more meltdown awaits.
