This morning it is deja vu all over again. In March of 2008, after having warned my readers for three months that a crash was coming, I wrote a piece about what I called Savage Capitalism. The short selling sharks had managed to crash Bear Stearns and now were swimming around with blood on their snouts looking for their next prey. It would be Lehman Bros. The whole notion that the great fortunes of the present day were made selling short, was a particularly dispiriting one.
I’m a boomer and I was raised in the 50’s with a healthy respect for the great companies and fortunes made from producing the goods America wanted. Whether General Electric, Ford Motor, AT&T, IBM, all were producing world class quality products. Even banks like Chase Manhattan and Bank Of America added great value to the American economy. But things are different now. The great fortunes get built betting on failure. John Paulson, who personally made $5 Billion in 2010, did it by shorting mortgage securities that he designed to fail. George Soros made $1Billion in 1992 shorting the British Pound.
At this very moment the school of short-selling sharks is circling the bonds of Portugal, Greece, Italy, Spain and Ireland. Their big score is if they can get one of those countries to default. At a certain point, like Greenmail, these become self-fulfilling prophesies. But why is capitalism so vulnerable to these crashes? Nouriel Roublini thinks he knows.
So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.
Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities.
This is the issue I’ve been trying to raise in the past weeks. Extremes of inequality do not come without costs. But it’s not just a problem of civil unrest. It affects the middle class too. A financial market that is controlled by computers and High Frequency trading is not performing the role of providing capital to industry or even providing a secure place to the average investor to put their retirement money. Look at this chart of Apple over the last week.
Was there anything that Apple did as a firm to cause their valuation to fluctuate so drastically in the last five days? No. It’s just the damn high frequency trader’s algorithms slamming in and out of the stock. How is this societally productive? It isn’t.
Look, we are in a hell of a fix as a country. We need to create about 6 million jobs in the next 24 months. Many of those jobs will need to be for people without a college education and those can’t be just hamburger flipping jobs. We need to re-employ the carpenters, masons and machinists that have been laid off in the last four years. How are we going to do that? We don’t need a lot of new houses or office buildings. What we do have is a lot of broken down school houses, police stations and fire houses. We need a Rebuild America Plan and I think it has to be done on the local level. Obama should announce that we are going to experiment with 50 different solutions to put people back to work. Every state will be given a block grant based on a percentage of what their citizens paid in Federal Income Tax. These grants would have no strings attached, but rather be used as the state sees fit to rebuild their crumbling schools bridges and roads.
The next 15 months is going to be a battle for the soul of America. On the one side are the Savage Capitalists making fortunes on the 450 point drop on the Dow this morning. Enabling them are politicians like Pat Toomey and Jeb Hensarling, fighting to preserve unregulated markets and Hedge Fund Tax Breaks. They believe there is no role for the public sector in America’s recovery. On the other side are those of us who believe that the road to recovery starts with rebuilding those public goods like schools and roads and in process put a lot of middle class folks with real skills back to work. This is a fight worth having.