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Tuesday, November 22, 2011

Five Ways that Financial Elites are Destroying Democracy


Is democracy compatible with a financial system run by billionaires? Maybe not.

Is democracy compatible with a financial system run by billionaires? Maybe not. Here are five ways that high finance is undermining democracy:

1. Billionaires replace one person, one vote.

Ask any American what’s wrong with our country and they will say that money rules politics. And they are correct. It’s obvious that major political donors and lobbyists for the super-rich have more political influence than we do. As the top 1 percent gains more and more of the nation’s income, the 99 percent effectively become disenfranchised. And of course, the Citizens United Supreme Court decision makes it even easier for the rich to buy political power. Lopsided campaign contributions by and for the super-rich are making a mockery out of elections. In 2010, for example, business outspent labor by a factor of 14 to 1.

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2. The stock market exercises an instant veto.

Virtually every economic decision in our democracy is now subject to an instant stock market veto. The first question asked by the White House and Congress before making a policy decision is “How will the markets react?” When the House of Representatives rejected the first TARP bailout bill on Sept. 29, 2008, the stock market fell by a record 777 points. After it passed, the markets were “calmed.”

Now, the New York Times reports that if the deficit “supercommittee” doesn’t get its act together by its Thanksgiving deadline, markets won’t like it:

    Some fear that such a failure could lead to the kind of stock market slide and loss of investor confidence that accompanied stalled efforts to raise the federal debt limit earlier this year.

Just who comprises “investor confidence?” Who makes financial markets dive in a matter of moments? Well, it’s certainly not those of us who piddle around with our 401ks in E-trade accounts. It’s not our slow-moving pension funds either. Rather, it’s the proprietary trading desks of big banks and the giant pools of unregulated cash in hedge funds. These big-time players have a very keen sense of their own self-interests. They have made it perfectly clear to the supercommittee that they want massive debt reduction so that 1) their bonds and bets will stay valuable; and 2) they won’t have to pay higher taxes on their outrageous incomes and profits.

Because of the skewed distribution of income, these money manipulations have enormous impacts on markets and therefore also on our 401ks. When they drive the markets down, we feel it as well. They’re holding us hostage and counting on us to suffer from financial Stockholm Syndrome – that we’ll side with our financial captors. Financial elites know we are likely to urge our politicians to avoid any moves that might drive markets down.

3. Governments are not permitted to create full employment economies.

The Wall Street casino crash killed 8 million jobs in a matter of months. It will now take more than 20 million jobs to get us back to full-employment (defined as an unemployment rate of 5 percent or lower.) At the current rate of recovery, it will take nearly a generation to get there. This is intolerable.

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Why aren’t the jobs there? Unless you’ve been blinded by ideology, it’s obvious that the Wall Street crash killed effective demand in the economy. Without that demand, business won’t hire and invest. It’s not rocket science. With unemployment so high, consumers don’t have the economic muscle to generate that demand. The obvious answer is for the government to step in to put our people back to work. The government needs to spend money – even if it has to go deeper into debt – to hire more public sector workers and to spend money on labor intensive programs like weatherization, higher education, infrastructure rebuilding and the like. We need a massive set of programs to create full-employment – which is supposed to be the key goal of our economy.

So why aren’t we doing it? It’s not just the Republicans who stand in the way. Behind them are a phalanx of financial elites who are putting forth an outright lie – that jobs will come from less government spending and fewer regulations. They claim – and with a straight face no less – that freeing them from regulations will create more business confidence, more investment, and therefore more jobs. They refuse to admit that deregulation led to the crash in the first place. Rather, they are flooding the airways with pious statements of concern about the how the government must clear up its debt by cutting all levels of government. They never explain how this is supposed to create jobs. They can’t. That’s because you can’t create jobs by cutting jobs.

Our bankers are shrewd. They see a stalled economy due to lack of stimulus, so they call for even less stimulus. Why? Because, it’s a perfect way to change the conversation from taxes on the super-rich to pay for job creation to cutting the big, bad government. Some even have the nerve to call for “tax reform” to further lower taxes on the super-rich and large corporations.

What would happen if a government really pressed for full employment? Stock market manipulators will start a stampede to drive down the markets. Politicians will run scared and you’ll stay unemployed.

4. Hedge fund speculative raids replace elected leaders with technocrats.

Just take a look at Greece and Italy. In both cases, financial markets -- not the country’s citizens -- are determining who will run the country and what those leaders will do. To placate financial markets and increase “investor confidence” both countries have replaced their leaders with economic technocrats who supposedly will rise above politics and get the country’s finances in order.

But why is this happening now? Because those countries are being attacked by large hedge funds that are trying as hard as they can to create financial runs and profit from them. It’s called a speculative attack. Here’s how it works. Basically, these hedge funds try to start a stampede of selling to drive down the value of bonds of a given country. (When bond values decline, their interest rates go up.) They do this by finding a myriad of ways to bet against those bonds. They can sell bonds they own. They can sell bonds that others own, (shorting). They can buy default insurance to bet against the bonds. And they create many toxic combinations of the above using massive amounts of borrowed money to amplify their negative bets.

If they do it right, all that selling drives down the price of the bonds, and that in turn scares other large investors from mutual funds and banks into selling their bonds as well, thereby further driving down the price. The more the price falls the more the hedge funds earn. And we’re talking a about “earning” tens of billions from this kind of stampede.

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Meanwhile, the country involved sees the interest rates it must pay on new debt go up and up. At some point, that percentage hits a magic level – like 7 percent – which means they can’t possibly pay back all of their debt. These high interest rates then cause an every larger stampede as bond holders rush to sell their bonds before they default (or as in the case of Greece before they “voluntarily” agree to a 50 percent cut in value – a “haircut.”)

(In case you have any doubt about the raids, look at the chart above. The jump in interest rates didn’t come about because of new developments in Italy. The jumps were caused by the hedge fund raids.)

If the hedge fund elites are really lucky, the stampede they induce can turn into what the press calls “contagion” -- the spread of the crisis to another country. This happens because many of the Greek and Italian bonds are held by big banks in countries like France. So if Italy is in danger of default, then so are the banks in France, which means that France will have to bail out its banks, which means that France’s bonds will look weaker and its interest rates will rise, leading to a new speculative hedge fund raid on French bonds. And so it goes with each new crisis leading to more profits for the hedge funds that ignite the stampedes

To stop these hedge fund attacks, countries are given only one choice – do whatever high finance says. And what high finance wants is very simple – slash and burn all of your social programs so that you can pay back your loans – you borrowed from us and now you have to pay us back even if it means impoverishing your people. To get that done, financial elites want “regular” politicians replaced by technocrats as just happened in Italy and Greece. But most of all they want to see those cuts.

5. Financial markets are vetoing Social Security.

Perhaps the most popular democratic program in American history is Social Security. Everyone pays in and everyone gets a defined benefit pension from it –rich and poor alike. Republicans have been trying to dismantle it for at least a generation, but the American public has expressed its democratic will in full support of the program again and again.

But financial elites also have Social Security in the cross-hairs. They tell us we can no longer afford it. It’s too generous. We live too long and we are getting too many payments. It’s going to bankrupt the country.

Why can’t we afford it? Because we ran up enormous debts to save the economy from the Wall Street-induced crash. Because, we cap rates at $105,000 of income instead of having the rich pay more. Because, the super elites are paying lower and lower tax rates in general.

No matter. The financial elites have the ear of both parties so that even President Obama, supposedly a liberal Democrat, has done what no Democrat has ever done – he put Social Security on the table to get a grand deficit reduction bargain.

But here’s the grand bargain that Wall Street really wants, and they plan to get it no matter whom we vote for. To “save” Social Security we will be pushed toward private investment accounts – Wall Street’s wet dream. Imagine the entire country paying fat fees to Wall Street to invest our Social Security money. We will be told we can only save Social Security if it ceases to be a defined benefit plan. We’ll be sold the wonders of investing the money ourselves – of course with the help of our trusted investment advisers from every bailed-out bank in the country.

Will financial elites replace democracy?

It’s happened before. When New York City almost defaulted in 1975, the Emergency Financial Control Board was established to take financial authority away from politicians. Imagine what might happen if Washington continues on its path to permanent gridlock and if the American people totally give up on their elected representatives. Imagine if the US debt gets downgraded by our whorish Wall Street rating agencies. Imagine if unemployment rises even higher and riots break out in the streets. Wouldn’t it be possible for the congressional supercommittee to turn into the Super-Emergency Control Board run by kindly investors and corporate leaders like maybe a Warren Buffet? Doesn’t having a benign financial emperor sound like a more “practical” alterative to a dysfunctional democratic system?

We’re not there yet but we’re headed that way…unless we dramatically curtail the power and wealth of our financial elites.

The threat to democracy isn’t new to America. President Andrew Jackson identified the threat that elite bankers posed to our fledging democracy when he vetoed the National Bank in 1832. Here’s a small excerpt from his veto message:

    It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. ….In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society -- the farmers, mechanics, and laborers -- who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government.

Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of 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 (Chelsea Green, 2009).

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