Posted by mariah01
What was more horrifying than last year’s financial implosion: That it happened, or that the average person couldn’t make sense of it?
Fortunately, Les Leopold was already looking into the complex financial instruments that nearly brought down the economy and, incidentally, the retirement funds of five Wisconsin school districts, which may be on the hook for $200 million in bad investments. The result of Leopold’s work, The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity, is an easy-to-understand explanation of what went wrong, and why. How clear and confident is Leopold’s prose? I finally feel like I understand what the Wall Street masters of the universe were up to—and I’m angry. I highly recommend this book.
Books We Like
Review by Hazel Henderson
Both of these books are excellent accounts of the 2008-2009 financial meltdown – from different and complementary perspectives. Barry Ritholtz is an irreverent Wall Street insider with a bare knuckles critique of the “idiotic” bankers and other big players who brought down the system. Les Leopold’s clear account of why we allowed the
financial sector to run amok is from the perspective of the public sector, labor unions and NGOs. Both authors come up with the most likely ways to return finance to its limited role as servicing the real Main Street productive sectors.
There is a window of opportunity today for the needed re-structuring and downsizing of financial sectors worldwide.
Leopold advocates 1% fees on all financial transactions, starting with $4 trillion of daily currency trading as I have advocated for over 15 years (see, for example, the Foreign Exchange Transaction Reporting System (FXTRS) and my Building a Win-Win World (1996).
These authors assess the endemic instabilities of financial markets which have been documented by the succession of booms, busts, recessions and panics over hundreds of years. Experts from John Maynard Keynes and Hyman Minsky to contemporary accounts by Nassim Nicholas Taleb in The Black Swan (2007) and Richard Bookstaber in A Demon of Our Own Design (2007) have driven the point home: markets are neither efficient nor rational and the “invisible hand” described by Adam Smith in his Wealth of Nations (1776) is a myth. Barry Ritholtz’s Bailout Nation provides a witty and devastating look from the inside.
Read the whole review here.
June 1, 2009
Can a Book on Derivatives Be Delightful?
Great teachers love metaphors. To help learners grasp the unfamiliar, great teachers — like Les Leopold, the founder of the respected Labor Institute in New York — latch on to realities students already understand. Leopold has been using metaphors, for decades, to help working men and women understand how our economy really works.
But two years ago, amid the gathering Wall Street storms, Leopold suddenly realized that, as a teacher, he really didn’t understand the high-finance “innovations” just then beginning to crash into the headlines, the CDOs and the swaps, the tranches and the quants.
So Leopold set about to educate himself on Wall Street’s innards, and now he’s sharing what he has learned — in an energizing and remarkably entertaining new book, The Looting of America.
The book’s core, perhaps not surprisingly, revolves around a delightfully insightful metaphor. If you really want to comprehend how Wall Street has melted down our economy, Leopold suggests, give a look to fantasy baseball.
In fantasy baseball, groups of baseball fans create their own “teams” and stock them with players they pick from lists of real-life baseball players. If the players you pick for your fantasy team do well on the real-life baseball diamond — if they hit lots of homers, for instance — your fantasy team will do well.
Your fantasy team, in effect, “derives” value from real baseball. You have no actual relationship to this real baseball. But you can still make money, playing fantasy baseball, if the real-life players you pick for your fantasy team put up better numbers than the players your fantasy league competitors pick.
“In effect,” explains Leopold, “you are speculating on the stats derived from real major league players, but those players don’t know they’re playing on your team.”
This same sort of speculation, over recent years, has been driving Wall Street. We have “fantasy finance.” Bankers and traders have created a sticky global web of “derivatives” — collateralized debt obligations, credit default swaps, and more — that bear the same relationship to the “real” economy as fantasy baseball bears to real balls and strikes.
In the “old” days, bankers and traders bought and sold claims to real things. Owning a stock entitled you to a stake in a real enterprise. Holding a mortgage gave you a claim to an actual home. In fantasy finance, bankers and traders don’t have to hold a claim on anything real. They buy and sell financial products that only “derive” their value from real economic activity.
Bankers, for instance, can sell you a “derivative” that will rise in value if the price of oil goes up. They don’t have to own any oil to sell you this derivative. They can create derivatives based on anything.
But the fantasy baseball metaphor, Leopold notes, only takes us so far. Fantasy baseball players don’t claim they’re “improving” baseball. And they can’t cause any great damage either. If baseball players go out on strike, fantasy baseball leagues simply grind to a halt. No big deal.
Fantasy finance, by contrast, involves trillions of dollars. And the players of fantasy finance have spent decades insisting that these trillions help our economy by “spreading economic risk.” In fact, their derivatives ended up concentrating risk — and wrecking the economy.
At the root of all this fantasy: the concentration of America’s income and wealth that began in the 1970s. With so much money in so few pockets, our real economy couldn’t offer enough lucrative opportunities for the investor class. Wealthy investors would find those opportunities in fantasy finance.
The Looting of America traces how all this unfolded with clarity, wit, and patience. And hope. The bank bailouts and partial federal takeovers we’ve so far seen, Leopold points out, do help clarify the “fateful choices” we now face.
“We can hold onto and supervise the semi-socialized financial sector,” he notes, “or we can return the entire banking system to private investors. We can enact policies that allow workers’ real wages to rise. Or we can keep the wealth flowing upward to the super rich. We can put limits on financial engineering, or we can wait and see what the next orgy of fantasy finance does to our economy.”
Crucial choices. Thanks to Les Leopold, many more of us will understand them.
Between the Lines
Published: May 31, 2009
How's this for an eye-catching tagline? "If I can understand this crap, so can you." Chelsea Green Publishing, in White River Junction, is highlighting that line from Les Leopold's introduction to his new book about the financial crises, "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."
Leopold argues that the meltdown has very little to do with subprime mortgages. About $300 billion in such mortgages are in default or nearly so, but the resulting crash has already cost more than $2 trillion in bank bailouts and loan guarantees.
Instead, he sees a decades-long pattern of increased productivity by rank-and-file workers while their wages (adjusted for inflation) have actually dropped. The resulting profits that accrued to the owners of capital had to go somewhere. Even the rich can buy only so many yachts and houses. Some of the money went into new factories and new companies. But there was so much floating around that "real" economy investments couldn't soak it all up.
So the financial sector invented scores of new "fantasy" financial instruments for the wealthy to buy, Leopold writes. Not so many years later, those proved to have been mere casino bets based on nothing of value.
Leopold has a master's in public administration and has worked for years on matters of labor, public health and the environment.
Create Real Democracy
Monday, May 25, 2009
Posted by Greg Coleridge at 4:40 PM
The Looting of America
An accurate term to describe the causes of and prescriptions to the current economic crisis is “the looting of America.” That is also the title of a new book by Les Leopold, co-founder and director of the Labor Institute and Public Health Institute and among those who formed the labor-environmental Blue-Green Alliance.
Leopold attempts through the book the near impossible: to clearly and simply describe the root causes of the global economic crisis, the bizarre and complex financial instruments created which resulted in astonishing profits by transformed liabilities into assets, and a range of moderate to radical policy changes to reign in the fantasy-finance casino perpetrated by giant financial corporations and others.
The root of the current crisis goes back to the 1970’s when worker productivity and real worker wages began to diverge. Between 1945 and 1973, as productivity increased (more products and services were produced by workers per hour), firms sought more workers to increase their own profits. This drove up the price of labor.
It all changed beginning in 1973 when corporate owners no longer reinvested productivity profits back into firms (the real economy) or with workers to the same degree. Capital owners kept productivity profits for themselves. The percentage of wealth owned by the top 1% began to sour. Capital owners began looking for alternatives sources of profit of their extra wealth with high rates of return and little risk. The era of fancy financial instruments, led by derivatives, was born.
The derivative, credit default swap, collateralized debt obligation, and other fantasy finance “instruments” are defined and explained with excellent analogies in many cases. Derivatives, for examples, are compared to fantasy baseball where hundreds if not thousands of persons compete by betting on the statistics of real players yet none of whom actually own any of the real baseball teams or have any control over any of the real players. Similarly, derivatives derive their value from some real entity – a stock or bond. Hundreds, if not thousands, can own bets on the same single stock or bond. It’s a financial casino.
The flood of hundreds of billions of dollars into the casino economy fueled more and riskier bets and the housing boom. It enriched the financial corporations that were involved in this new business. As wages declined, debt increased and consumer spending eventually slowed. Meanwhile, real businesses were unable to secure credit for innovation as financial institutions looked to fantasy finance as more profitable.
The housing and debt bubbles burst because that what bubbles do.
Leopold devotes the last two chapters to solutions – divided between, as he says, “Proposals Wall Street Won’t Like” and ones they really won’t like.
In the former category are:
- Financial Disaster Insurance – premiums from every conceivable financial sector transaction to pay back taxpayers from the current raid on the treasury and for the recession caused by the financial casino and for the next one. He estimates this could amount to $500 billion per year.
- Financial Product Safety Commission – creation of an FDA-like product-approval process before any type of financial “instrument” is permitted on the market.
More radical proposals include:
- Wage caps – a $500,000 salary cap of any employee at any financial corporation – the salary of the US President.
- Passage of the Employee Free Choice Act – to give workers a chance to increase their collective power.
- Raising the minimum wage – to guard against deflation and to shift wealth away from the fantasy-finance casino.
- Public takeover the largest pieces of the private financial sector – to protect taxpayers, our economy and what’s left of our democracy.
Leopold has provided a valuable tool to demystify Wall Street’s destructive actions and a variety of tools for public actions to assert greater public control over money and finance.
May 22, 2009 at 12:02:57
Fantasy Finance and Real Fixes
by David Swanson
If you're like me you find it at least a bit disturbing that we're giving trillions of dollars to save the economy to the very people who wrecked it, and more disturbing that we're doing so without any solid basis for expecting to get much of it back and without making fundamental changes to prevent a repetition. But if you're like me, you also aren't 100 percent certain how a credit default swap works with a cubed collateralized debt obligation, much less whether such a monstrosity needs to be eliminated or reformed. What to do?
Well, a coalition of concerned citizens called "A New Way Forward" ( http://anewwayforward.org ) is organizing teach-ins everywhere on June 10th ( http://anewwayforward.org/demonstrations ) and if you don't have people who feel up to the role of teachers, or even if you do, there's a terrific video at that website to download, show, and discuss. Just doing this much will make you more confident in discussing the single largest transfer of wealth any of us have seen, and it will connect you with others who share your concerns as well as your hesitations. There is also a wonderful collection of articles and books available on the right hand side of this page: http://anewwayforward.org/blog
A New Way Forward has digested this information and arrived at three proposals:
"NATIONALIZE: Experts agree on the means -- Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts.
REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.
DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place-- new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function."
I'm inclined to agree with those general ideas, but I've also just read an excellent new book that takes a broader view and offers broader solutions while calling into doubt the idea that the fixes listed above will be sufficient on their own. I recommend adding to any financial shenanigans reading list "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," by Les Leopold. The introduction to this book ends thus:
"And then there's the subprime-mortgage puzzle. The financial media has all but concluded the crash was caused by risky mortgages taken out by poor people and deadbeats who couldn't afford them, and issued by reckless lenders who should have known better. About $1.3 trillion worth of such mortgages are out there. Of that, about $300 billion are in default or nearly so.... Please, can someone explain how that amount (about 2 percent of household net worth, could devastate the world's financial system? To date, the taxpayer has put up about $2 trillion in bank bailouts and loan guarantees. Why didn't that take care of the problem long ago? Like some perverse modern-day miracle of fishes and loaves, how did $300 billion of bad debt multiply into trillions of dollars in financial toxic waste? Poor people did all that? In this book I go after these questions -- and I hope the answers will tell us a good deal about our economic woes and what to do about them. At the very least, I hope to contribute modestly to our collective financial literacy. In short, if I can understand this crap, so can you."
And you really can and it's really worth doing. The bulk of "The Looting of America" is devoted to the explanation of what's happened. And the root cause turns out not to be deregulation or oversized banks or a lack of accountability for fools and crooks, although all of those things helped. The tragic flaw in the system turns out to be the now-thirty-year-old divergence of productivity and income, the denial of a steady share of our own earnings to working people, the gradual transfer of great sums from the rest of us to a very small group of extremely wealthy people. Of course, such a transfer of wealth might seem offensive, but how could it actually cause the situation in which we needed to transfer another huge pile of wealth to the same people through our government? Well, essentially we created a situation in which investors couldn't find anything in the real economy to invest in anymore. All the real stuff was already invested in. Had someone created a way to invest in new industries, infrastructure, green energy, and mass transit, we might all be smiling about it now. Instead, investors figured out ways to invest in fantasies, to make bad investments look good, and to gamble other people's money on the fate of yet other people's investments without investing in anything real at all.
So, when Leopold comes to his recommendations at the very end of the book, some of them may sound familiar and others harebrained, unless you've read the preceding chapters, in which case they all sound sensible or newly strengthened. The recommendations include (in a list I've created by pulling ideas out of the text):
1-Financial disaster insurance: we should collect premiums (or taxes) from all financial transactions to sure up the real economy against the next collapse of the fantasy one by investing in infrastructure and all the useful real investments that those with too much money on their hands don't always manage to find or create on their own.
2-Without expecting that we can prevent the next bubble and burst, we should attempt to lessen it by establishing a Financial Product Safety Commission that would ban dangerous financial "products" like collateralized debt obligations. Any product too difficult for skilled regulators to comprehend would be banned for that reason alone.
3-Undo the transfer of the wealth from our increased productivity: "If each billionaire inside the casino walked out with 'only' $100 million per person, they would leave $1.52 trillion sitting on the table. If these chips landed in the public coffers, let's say via steeply progressive income and wealth taxes, we could invest $150 billion a year in developing and deploying renewable energy alternatives -- ten times what President Obama called for during his campaign. Or we could provide free tuition for every student at every public college and university -- in perpetuity."
4-Re-unionize. Permit it by passing the Employee Free Choice Act.
5-Cap the salaries at any financial company taking government money at the salary level of the U.S. president ($400,000). Or do that for all companies taking public handouts.
6-Create single-payer health coverage, which would provide a significant stimulus to the economy.
7-Create a maximum wage.
8-Raise the minimum wage.
Another central concern for many worried about our financial fate is the role played by the Federal Reserve, which someone rightly remarked is no more federal than Federal Express. It's a private company running our financial policies and inventing and distributing money. Not only does the Constitution place such powers in Congress, but the Congress is currently not even permitted to know what the Fed is up to. It would be, however, if H.R. 1207, the Federal Reserve Transparency Act of 2009, were to pass the House of Representatives and an unprecedented avalanche of public pressure force the Senate to miraculously go along. The House bill has 179 cosponsors plus one sponsor. That's almost unheard of. No bill has that many cosponsors. It only takes 218 votes to pass. So, if we could get 38 more cosponsors we'd be getting somewhere. Here's a page on which to take action:
(And, by the way, applause to my congressman Tom Perriello who has signed onto this -- the second thing he's ever done that I applauded.)
There's also a particular regulation that ought to be enforceable and in fact used to be enforced fairly well, that would limit the ability of the non-working class to rip the rest of us off. I'm talking about a ban on usury. There are bills in both houses of congress to limit the interest that creditors can charge. Senator Bernie Sanders' bill (S. 582) would limit interest to 15 percent. Even those who believe we would all perish if billionaires had to fly on the same airplanes as other people and couldn't purchase that third yacht might support the idea of limiting the interest on their own credit cards to 15 percent. Surely the masters of the universe can make a dishonest living at 15 percent the same as at 22 percent or 400 percent, right? Now would be a good time to call your senator and representatives.
Labor Advocate Online
The Casino Class
Reviewed by Bill Onasch
If you want to know why it was necessary to give over a trillion dollars to big banks and insurance companies over the last year Les Leopold’s new book is for you. Carrying on the tradition of the Labor Institute he helped found and now directs, Leopold manages to explain the most complex shenanigans of finance capital in language the average worker can understand. To keep us going off the deep end in to despair he sheathes the sharpest edges with some humor. He even closes with some suggestions of what to do.
The reader finds out about derivatives; collateralized debt obligations, including their squared and cubed variations; credit default swaps; and, most inventive of all, synthetic collateralized debt obligations. You’ll also be equipped to impress the counterman on your next trip to the deli by instructing him to tranche your corned beef thin and extra lean. If, like me, you at first find yourself having trouble keeping these byzantine terms straight you can bookmark a handy glossary included by the author in the back.
It wasn’t intended that even mere stock brokers or politicians, much less workers, would ever understand this strange new lexicon, with its underlying definitions of finance. The author quotes former Senator Phil Gramm (of Gramm-Rudman fame) “politicians don’t know a credit default swap from a turnip.” This is the brave new world of “fantasy finance,” exceedingly complicated, not possible before powerful computers started appearing on bank desktops.
But once those PCs arrived, and the old firewall between investment and savings banks was scrapped, thousands of creative hustlers at banks big and small started designing new custom-made over-the-counter securities for customers eager to get more bang for their buck. Leopold explains how early perceived successes in this completely unregulated arena ultimately led to their handling of trillions of dollars–mostly other people’s dollars–like they were playing Fantasy Baseball.
There were a few sticks-in-the-mud who warned early on, even fifteen years ago, the potential for disaster and urged regulation. They were dressed down not only by Greenspan and Bernanke but Obama’s financial gurus as well–Volcker, Rubin, Summers, Geithner. All are free marketeers who likely review a few pages from Milton Friedman before going to bed every night.
If the gambling casinos had been risk takers on a par with the financial casino Las Vegas and Atlantic City would have become ghost towns long ago. With no one–not even the vaunted credit risk evaluators such as Moody’s and Standard & Poors--telling the bankers about their evolving nudity they lost their shirts and got caught with their pants down when the housing bubble burst. Their delicately layered tranches–“insured” by those turnip-like credit default swaps-- forced them to coin yet a new term–toxic asset. The U.S. meltdown also had ramifications throughout the world, even bringing down the government of Iceland.
Suddenly the banks not only had to suspend their fantasy finance; loaded with toxic assets they could no longer carry out their day job of providing basic credit for the day-to-day operations of industry and commerce. Plants and stores started closing. Blue chip companies geared to just-in-time cycles started looking at bankruptcy. That’s what led the free marketeers of both parties to unite around the extraordinary measures of the TARP bailout and even defacto nationalization in some cases.
“At least a trillion dollars was handed to big bankers in 2008 and 2009, with very little debate. This is borrowed money that we, the taxpayers and our children, are on the hook for. It’s an immediate transfer of wealth from present and future generations to the largest financial institutions in the world. It may well be the largest wealth transfer since African-Americans built the South. We went along because the financial markets had a gun to our heads. No bailout, no lending. No lending, no economy.”
Nobody tells this story better than Leopold. He also does a great job of explaining the decline of the working class in the USA. The decoupling of productivity and wages, that had moved in tandem through the Fifties and Sixties, mirrored the decline in unionization–especially since Bill Clinton’s NAFTA gave new impetus to offshoring unionism’s manufacturing base.
Unfortunately, the masterful job in looking at the grand scale of class relations and class crisis in the earlier chapters, that left us hungry for the solutions, becomes diluted in to a rather thin soup in the concluding ones. Some regulatory reforms, nationalization of banks, increased minimum wage, passage of labor law reform such as EFCA, are not bad things but hardly seem up to the epic struggle now required. Leopold says,
“…the choice is not between total socialism and unfettered capitalism. Given the vast complexities of our global economic system, we need to make room for more nuanced alternatives.”
I’m not sure what “total” socialism would be. The woman who cuts my wife’s hair in a salon in her home probably doesn’t have to be part of a nationalized planned economy. But there’s no long term future for peaceful coexistence of planned and market economies in any nuanceed setting in my opinion. The meltdown of the financial market might have been ameliorated by regulation but it was still driven by the basic internal laws of capitalist markets.
Merely preventing market catastrophes is not good enough. The market economy--especially with its vast global complexities–will continue to transfer more and more of the wealth we produce to the ruling class. And it is a obstacle that must be removed for the huge job of economic conversion essential to saving our biosphere from destruction by global warming. Only a democratically planned economy can handle that urgent task.
But answers to these questions are more than we have a right to expect from one book–or one book review. All in all, Les Leopold has done a commendable job with the Looting of America. Every worker trying to sort out the mess we find ourselves in should read it.
May 28, 2009
The End of Money and the Looting of America
Posted by rushkoff, May 13, 2009 5:45 AM
Douglas Rushkoff, the author of Life Inc., is a guest blogger.
No, not an essay from me about the end of money, but a great new book from Thomas Greco called The End of Money and the Future of Civilization, out last month from Chelsea Green. It's a comprehensive look at the bias of centralized currency, as well as the history of other approaches to money and why some of these other models should be resurrected.
Of the many books approaching this subject matter (I read a ton of them; this one wasn't available yet) this is the most straightforward explanation I've yet seen of everything from usury to inflation, credit clearing to web-based trading, local self-determination to complementary exchanges.
Very few people realize that the nature of money has changed profoundly over the past three centuries, or--as has been clear with the latest global financial crisis--the extent to which it has become a political instrument used to centralize power, concentrate wealth, and subvert popular government. On top of that, the economic growth imperative inherent in the present global monetary system is a main driver of global warming and other environmental crises.
To me - as you can tell from my posts here - most of this should be common knowledge. Unfortunately, it is still considered as questionable by many as, say, the theory of evolution. But instead of "balancing" a description of economic reality with faith-based "facts" from the other side, our job as writers is to tell it like it is, and refuse to pretend that it's all a matter of interpretation. Greco rises to that challenge.
If you're more interested in the recent credit crisis, what really happened, and how we might best respond to the fraud and cynicism that characterized the last few years of banking and policy, check out another Chelsea Green title, Les Leopold's new book, 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. Here's Leopold in his introduction, explaining the growth of the finance industry:
The financial sector, up until the 2008 crash, was one of the fastest growing sectors of the economy, generating approximately 20 percent of our gross domestic product. It also accounted for 27.4 percent of all corporate profits. Finance grew as manufacturing declined, thereby dominating the real economy. According to the Bureau of Labor Statistics, in 1940 there were 7.1 manufacturing jobs for every job in the financial service industries. The ratio increased to 7.7 in 1950. Then the slide started, as you can see in chart 1 . By November 2008, there were only 1.6 manufacturing jobs per financial services job. Until the current meltdown, the financial industry produced almost 10 percent of all the wages and salaries in the country, up from 5 percent in 1975. In a few years, provided that the system doesn't collapse entirely, the finance sector is going to be larger than the manufacturing economy.