Author Q & A
Chelsea Green Publishing: Everyone’s talking about the financial crisis, but much of the information is convoluted and inaccessible. What can the average person on the street hope to understand about the ins and outs of this mess?
Les Leopold: I’m hoping the average person will pick up two kinds of things: First they’ll get a big picture sense of how we got into this mess. It’s not a housing crisis. It’s a crisis of too much wealth in the hands of too few people. That lethal combination led inevitably to the creation of fantasy financial investments for the well-to-do, which now have crashed. Secondly, they’ll get an understanding of how Wall Street minted wealth by creating and selling those fantasy financial instruments and why that went sour.
CGP: What is a toxic asset?
LL: It’s a financial instrument (like a collateralized debt obligation) that has so collapsed in value that no one wants to buy it... at any price. It’s toxic for banks and other financial companies because it sits on their books and may make them insolvent.
CGP: How much of this recession is a result of subprime borrowers, and how much a failure of the overall financial system?
LL: This recession has almost nothing to do with subprime borrowers. There’s about $300 billion of bad subprime debt right now. If that was the problem, the trillions of dollars that the government has pumped into the system would have taken care of it long ago. What really happened is a perverse miracle of the fishes and loaves—the financial industry sold that kind of debt many times over. Wall Street literally created new financial instruments that multiplied the impact of bad loans into trillions of dollars of toxic assets. They were permitted to do so because our overall financial system is out of control—those assets were unregulated and still are. Beyond that there is the serious question of whether or not free markets in finance are inherently unstable and subject to breakdowns.
CGP: You link the current economic crisis to the upward redistribution of income and wealth than began in the 1970s. Why is this link crucial to understanding what’s going on?
LL: It always pays to follow the money. Wall Street solves problems... for a price. And the problem they solved was what to do with all that money that the upper income brackets had accumulated. That money ran out of investments in the real economy so Wall Street literally created new investment instruments that supposedly had little risk. But where did all that money come from? It came from the fact that starting in the mid-1970s, real average wages stagnated while the economy continued to grow. The average wage the non-supervisory worker earns today is less (after accounting for inflation) than what average worker earned in 1975. So where did all the money go? It went to the top. And from there it went to fantasy finance investments that fueled financial bubbles which finally burst. Creating and selling those investments made Wall Street rich as well. This story is sure to repeat itself, if average wages don’t rise along with economic growth.
CGP: Why did Americans let the gap between workers’ wages and executive compensation grow so large?
LL: That’s a longer story and probably another book. But basically there was a major shift between the power of working people and the power of elites. One symbol of the shift is the drastic decline of unions, from representing about one in three workers in the 1950s to now representing less than one in ten. Many other factors also came together. The rise of globalization put many American workers in competition with low-wage labor around the globe. The ideology of deregulation caught on during the end of the Carter administration and accelerated under Reagan. This unleashed the financial casino which had been previously inhibited by New Deal regulations. The buying power of the minimum wage was allowed to decline. The social safety net was weakened. Income taxes on the wealthy were dramatically reduced. Put all of that together and wealth gushes to the top.
CGP: Many writers and commentators contend that it is the bankers’ “greed and excess” that led to the upheaval—how much weight do you put on this “character flaw” argument?
LL: Not much. There’s nothing new about greed. That’s how capitalism works. What matters is whether or not that greed is constrained through public policies. The New Deal did a pretty good job in containing it because our leaders understood that without such constraints the economic system would collapse. That’s one of the reasons we had a 90 percent marginal tax rate on millionaires, even during the Eisenhower years. But, we seemed to forget that lesson and deregulated finance. And again it crashed. Greed is a constant and we’re not about to change human nature. But we are able to change policies, which can temper excesses.
CGP: How do we make sure we never give our wages away to gamblers again?
LL: Good question. I’m not sure the public is ready to hear the answer: We need massive unionization or its equivalent. We need some kind of institutionalized movement that fights on behalf of the rest of us. That’s how you get policy that keeps the wealthy in check. That’s how you get rules that keep the financial casinos from reopening. We need very, very strong rules and taxes to limit the financial gambling. We might get some of that now, only because the collapse has been so deep. But over the long haul, we need large organizations to police those rules on our behalf. Right now I don’t forsee such organizations taking hold, and that’s a worry.
CGP: Is there anything we can do to get our money back?
LL: Yes. The very best move would be to place a small surcharge (0.003 percent) on each and every financial transaction—no matter what kind. That money should go directly to the federal government to be used for the public—not for bailouts. The financial sector will always find new ways to create new financial instruments. We need to slow that process down and to insure ourselves against the damage it might do even if when good regulations are in place. The best way is to put a surcharge on all of these transactions—currency sales, stocks, bonds, derivatives... anything and everything they create, buy and sell. It would probably generate over $500 billion a year for us. That’s how we can get our money back. They owe us plenty.