Chapter three of Simon Johnson and James Kwak’s new book — “13 Bankers, the Wall Street Takeover and the Next Financial Meltdown” has tons of statistics showing the astonishing growth of Wall Street over the last 30 years.

This growth was the result of the financial industry breaking free from the constraints legislated in the wake of the Great Depression.  Johnson and Kwak explain, “The basic principle behind any oligarchy is that economic power yields political power.”

This chapter shows how there was an “explosion of new products created vast new profit-making possibilities for financial institutions.” These  “money machines of modern finance” —  high yield debt, securitization and arbitrage trading, derivatives market — came from “powerful new computer technology and highly trained mathematicians and scientists from leading research universities.”

Excerpts:

• Of Ronald Reagan’s treasury secretary, Donald Regan, former Merrill Lynch CEO: “It was not unusual for a treasury secretary to come from the banking industry.  But it was unusual for a treasury secretary to embrace a deregulatory agenda as broad as the one Regan espoused.
• Between 1980 and 2000, the assets held by commercial banks, securities firms and the securitizations they created grew from 55% of GDP to 95%.  Financial sector profits grew even faster, from an average of 13% of all domestic corporate profits from 1978 to 1987 to an average of 30% from 1998 to 2007.  The growth was faster still for the largest banks.  Between 1990 and 1999, the ten largest bank holding companies’ share of all bank assets grew from 26% to 45%, and their share of all deposits doubles from 17% to 34%.
• In 1978, all commercial banks together held $1.2 trillion in assets, equivalent to 53% of U.S. GDP.  By the end of 2007, the commercial banking sector had grown to $11.8 trillion in assets, or 84% of U.S. GDP.
• All told, the debt held by the financial sector grew from $2.9 trillion, or 125% of GDP, in 1978, to over $36 trillion , or 259% of GDP, in 2007.
• Most of the growth in the financial sector was due to the increasing “financialization” of the economy — the transformation of one dollar of lending to the real economy into many dollars of financial transactions.  In 1978, the financial sector borrowed $13 in the credit markets for every %100 by the real economy; by 2007, that had grown to $51. … The amount of borrowing by financial institutions had quadrupled.
• From 1980 until 2005, financial sector profits grew by 800%, adjusted for inflation, while nonfinancial sector profits grew by only 250%.
• In 1990, Salomon Brothers paid its top traders then shocking cash bonuses of more than $10 million.  In 2009, it emerged that a single executive at Citigroup was due a $100 million bonus.
• In 2007, five hedge fund managers earned at least $1 billion each for themselves, led by John Paulson, who made $3.7 billion successfully betting against the housing market and the mortgage-backed securities built on top of it.

Written by Mike Bock

In an essay at Huffington Post, “Progressives and the Deficit,” Robert Creamer warns, “It would be easy for Progressives to fumble the growing debate on the federal deficit.”

He writes, “Austerity for seniors, cuts in education spending, reductions in spending on infrastructure — these are not long term solutions to America’s fiscal woes. They will make matters worse.”

Creamer gives six rules for how Progressives should approach the issue of the deficit:

1. Progressives should make it completely clear that we share the view that long-term deficits must be brought under control — the real question is how. There are a number of fiscal glide paths that reduce federal deficits over the long run.
2. We must insist that each of the alternative paths to reduce the deficit be evaluated using one key measure: How will it affect our success at creating widely shared economic growth?
3. In the short term — in order to dig our way out of the economic catastrophe that Bush and his friends on Wall Street left us — America needs more spending on jobs and economic growth. We need an expansionary economic policy now in order to jumpstart long-term growth for the future. …. The Great Depression did not really finally end until Emperor Hirohito’s bombing of Pearl Harbor gave American politicians the will to spend at levels that had previously been unheard in order win World War II.
4. The current push by Wall Street fiscal hawks to cut the long-term deficit by reducing payments to retirees on Social Security, or cutting back on critical programs like education, don’t meet that test.  …  Cutting Social Security payments does nothing but diminish the wide distribution of income that is essential to sustain long-term growth. … In 1969, the U.S. per capita Gross Domestic Product (our nation’s output of goods and services per person) was $20,994. Adjusted for inflation it had more than doubled by 2009 to $41,646. … The problem is that the wealthiest people in America have kept a substantial portion of that income gain for themselves.
5. We must always insist that whatever economic path is taken to assure long-term fiscal soundness in the future meets the test — will it stimulate widely shared long-term economic growth? To assure we meet this test, we must eliminate the confusion between investment and consumption in our federal budget. … It has to change if there is to be a political incentive to spend more federal dollars on investment in future economic growth.
6. Stay on the offensive. … The Pete Peterson’s of the world have geared up to use the new Presidential Fiscal Commission as a soapbox to promote their pro-Wall Street views that attempt to paint “greedy seniors” and out of control “entitlements” as the villains of the fiscal drama. We can’t cede any ground on this issue.

Creamer writes, “The tiny plutocracy that sopped up most of our economic growth for the last decade and gambled recklessly on Wall Street are the true villains of the piece. They are the same people who insisted on the massive Bush tax cuts for the rich and a tax code where hedge fund managers who literally make hundreds of millions of dollars each year pay taxes at a lower rate than the janitors who sweep their floors.”

Written by Mike Bock

Interesting article in The Smirking Chimp, by Norman Solomon, urges progressives to oppose President Obama’s nomination of Elena Kagan to the Supreme Court arguing that, if confimed, Kagan, “will move the Supreme Court to the right.”

Solomon quotes University of Illinois law professor Francis Boyle: “During the course of her Senate confirmation hearings as Solicitor General, Kagan explicitly endorsed the Bush administration’s bogus category of ‘enemy combatant,’ whose implementation has been a war crime in its own right. Now, in her current job as U.S. Solicitor General, Kagan is quarterbacking the continuation of the Bush administration’s illegal and unconstitutional positions in U.S. federal court litigation around the country, including in the U.S. Supreme Court.”

Excerpts:

• The White House is in the grip of conventional centrist wisdom. Grim results stretch from Afghanistan to the Gulf of Mexico to communities across the USA.
• The president (by nominating Kagan) has taken a step that jeopardizes civil liberties and other basic constitutional principles. … Unless the Senate refuses to approve Kagan for the Supreme Court, the nation’s top court is very likely to become more hostile to civil liberties and less inclined to put limits on presidential power.
• Here is yet another clear indication that progressives must mobilize to challenge the White House on matters of principle. Otherwise, history will judge us harshly — and it should.
• For more than 15 months, evidence has mounted that President Obama routinely combines progressive rhetoric with contrary actions. As one bad decision after another has emanated from the Oval Office, some progressives have favored denial — even though, if the name “Bush” or “McCain” had been attached to the same presidential policies, the same progressives would have been screaming bloody murder.
• But enabling bad policies, with silent acquiescence or anemic dissent, encourages more of them. At this point, progressive groups and individuals who pretend that Obama’s policies merely need a few tweaks, or just suffer from a few anomalous deficiencies, are whistling past a political graveyard.
• The corporate-military centrism of the Obama administration has demoralized and demobilized the Democratic Party’s largely progressive base …. For progressives, giving the Obama administration one benefit of the doubt after another has not prevented matters from getting worse. …. Progressives should fight the Kagan nomination.

Written by Mike Bock