- Wall Street banks have been saved from bankruptcy by
governments that are now going bankrupt themselves; but the banks are not
returning the favor. Instead, they are engaged in a class war, insisting
that the squeezed middle class be even further squeezed to balance over-stressed
government budgets. All the perks are going to Wall Street, while Main
Street slips into debt slavery. Wall Street needs to be made to pay its
fair share, but how?
- The financial reform bill agreed to on June 25 may have
carved out some protections for consumers, but for Goldman Sachs and the
derivatives lobby, the bill was a clear win, leaving the Wall Street gambling
business intact. In a June 25 Newsweek article titled "Financial Reform
Makes Biggest Banks Stronger," Michael Hirsh wrote that the bill "effectively
anoints the existing banking elite. The bill makes it likely that they
will be the future giants of banking as well."
- The federal government and Federal Reserve have advanced
literally trillions of dollars to save the big Wall Street players, to
the point where the government's own credit rating is in jeopardy; but
Wall Street has not had to pay for the cleanup. Instead, the states and
the citizens have been left to pick up the tab. On June 17,Time featured
an article by David von Drehle titled "Inside the Dire Financial State
of the States," reporting that most states are now facing persistent
budget shortfalls of a sort not seen since the 1930s. Unlike the Wall Street
banks, which can borrow at the phenomenally low fed funds rate of .2% and
plow that money back into speculation, states don't have ready access to
credit lines. They have to borrow through bond issues, and many states
are so close to bankruptcy that their municipal bond ratings are collapsing.
Worse, states are not legally allowed to default. Unlike the federal government,
which can go into debt indefinitely, states must balance their budgets;
and they cannot issue their own currencies. That puts them in the same
position as Greece and other debt-strapped European Union countries, which
are forbidden under EU rules either to issue their own currencies or to
borrow from their own central banks.
- States, of course, don't even have their own state-owned
banks, with one exception -- North Dakota. North Dakota is also the only
state now sporting a budget surplus, and it has the lowest unemployment
and mortgage delinquency rates in the country. As von Drehle observes,
"It's a swell time to be North Dakota."
- But most states are dealing with serious, chronic defaults,
putting them in the same debt trap as Greece: they are being forced to
lay off workers, sell public assets, and look for ways to squeeze more
taxes out of an already over-taxed populace. And their situation is slated
to get worse, since the federal government's stimulus package will soon
be cut, along with assistance to the states.
- The federal government is not only leaving the states
high and dry but is threatening to impose even more taxes on their beleaguered
citizens. Paul Volcker, former Federal Reserve Chairman and current White
House economic adviser, said in April that Congress needs to consider a
Value Added Tax (VAT) - a tax on various stages of production of consumer
goods. A VAT of 17.5% is now imposed in Britain, and 20% is being proposed;
while some EU countries already have a VAT as high as 25%. In Europe, at
least the citizens get something for their money, including federally-funded
health care; but that is not likely to happen in the U.S., where even a
"public option" in health care is no longer on the agenda. The
VAT hits the lower and middle classes particularly hard, since they spend
most of their incomes on consumables. The rich, on the other hand, put
much of their money into speculative trades, and those sales are not currently
- Business Cycle or Class War?
- Ismael Hossein-Zadehi, who teaches economics at Drake
University in Iowa, calls the whole economic crisis a class war. What is
being billed as public debt began as the private debt of financial speculators
who offloaded it onto the public. The governments that bailed out these
insolvent speculators then became insolvent themselves; but the bailed-out
banks, rather than lending a helping hand in return, have demanded their
pound of flesh, with payment in full. The perpetrators are blaming the
victims and insisting on "fiscal responsibility." Wall Street
bankers are dictating the terms of repayment for debts they themselves
- "Fiscal responsibility" means cutting spending,
something that is inherently deflationary during a recession, as seen in
the disastrous Depression-era policies of President Herbert Hoover. Not
that it was solely a Republican error. In 1937, President Franklin Roosevelt
also cut public spending, tipping the economy back into recession. Spending
cuts cause tax revenues to shrink, which results in more spending cuts.
Contrary to what we have been told, national governments are not like households.
They do not have to balance their budgets and "live within their means,"
because they have the means to increase the money supply. They not only
have the means, but they must engage in public spending when the private
economy is shrinking, in order to keep the wheels of the economy turning.
Virtually all money now originates as bank-created credit or debt; and
today the money supply has been shrinking at a rate not seen since the
1930s, because the banking crisis has made credit harder and harder to
- Instead of "reflating" the collapsed economy,
however, national governments are insisting on "fiscal responsibility;"
and the responsibility is all being put on the states and the laboring
and producing classes. The financial speculators who caused the debacle
are largely getting off scott free. They not only pay no tax on the purchase
and sale of their "financial products," but they pay very little
in the way of income taxes. Goldman Sachs paid an effective income tax
rate of only 1% in 2008. Prof Hossein-Zadehi writes:
- It is increasingly becoming clear that the working majority
around the world face a common enemy: an unproductive financial oligarchy
that, like parasites, sucks the economic blood out of the working people,
simply by trading and/or betting on claims of ownership. . . . The real
question is when the working people and other victims of the unjust debt
burden will grasp the gravity of this challenge, and rise to the critical
task of breaking free from the shackles of debt and depression.
- Working people don't rise to the task because they have
been propagandized into believing that "fiscal austerity" is
something that needs to be done in order to save their children from an
even worse fate. What actually needs to happen in a deflationary collapse
is to spend more money into the system, not pull it back out by paying
off the federal debt; but the money needs to go into the real economy -
into factories, farms, businesses, housing, transportation, sustainable
energy systems, health care, education. Instead, the stimulus money has
been hijacked, diverted into cleaning up the toxic balance sheets of the
financial gamblers who propelled the economy into its perilous dive.
- Evening Up the Score
- While Congress caters to the banks, the states have been
left to fend for themselves. Where is the money to come from to pull off
the impossible feat of balancing their budgets? Bleeding a VAT tax out
of an already-anemic working class is more likely to kill the patient than
to alleviate the disease. A more viable and equitable solution would be
to tap into the only major market left on the planet that is not now subject
to a sales tax - the "financial products" that are the stock
in trade of the robust financial sector itself.
- A financial transaction tax on speculative trading is
sometimes called a "Tobin tax," after the man who first proposed
it, Nobel laureate economist James Tobin. The revenue potential of a Tobin
tax is huge. The Bank for International Settlements reported in 2008 that
total annual derivatives trades were $1.14 quadrillion (a quadrillion is
a thousand trillion). That figure was probably low, since over-the-counter
trades are unreported and their magnitude is unknown. A mere 1% tax on
$1 quadrillion in trades would generate $10 trillion annually in public
funds. That is only for derivatives. There are also stocks, bonds and other
financial trades to throw in the mix; and more than half of this trading
occurs in the United States.
- A Tobin tax would not generate these huge sums year after
year, because it would largely kill the computerized high-frequency program
trades that now compose 70% of stock market purchases. But that is a worthy
end in itself. The sudden, thousand-point drop in the Dow Industrial Average
on May 6 showed the world how vulnerable the stock market is to manipulation
by these sophisticated market gamblers. The whole high-frequency trading
business needs to be stopped, in order to protect legitimate investors
using the stock market for the purposes for which it was designed: to raise
capital for businesses. As Mark Cubanobserved in a May 9 article titled
"What Business Is Wall Street In?":
- Creating capital for business has to be less than 1pct
of the volume on Wall Street in any given period. . . . My 2 cents is that
it is important for this country to push Wall Street back to the business
of creating capital for business. Whether it's through a use of taxes on
trades, or changing the capital gains tax structure so that there is no
capital gains tax on any shares of stock (private or public company) held
for 5 years or more, and no tax on dividends paid to shareholders who have
held stock in the company for more than 5 years. However we need to do
it, we need to get the smart money on Wall Street back to thinking about
ways to use their capital to help start and grow companies. That is what
will create jobs. That is where we will find the next big thing that will
accelerate the world economy. It won't come from traders trying to hack
the financial system for a few pennies per trade.
- Besides protecting legitimate savers and investors by
exempting stock held five years or more, they could be exempted from a
Tobin tax on total stock purchases of under $1 million per year. That would
make the tax literally a millionaire's tax -- and a small one at that,
at only 1% per trade.
- At the G20 summit in Toronto last weekend, a financial
transaction tax was discussed and supported by France and Germany but was
opposed by the U.S. and Canada, although nothing binding was resolved.
However, the states do not have to wait for the federal government or the
G20 to act. They could levy a Tobin tax themselves. Objection might be
made that the Wall Street speculators would take their revenues and go
elsewhere, but big banks and brokerages have branches in every major city
in every state. They are hardly likely to pack up their tents and leave
lucrative centers of business. Nor can it be argued that we should cater
to the pirates who are looting our stock markets because they are paying
us a nice bribe, because they aren't even paying a bribe. Financial trades
do not currently generate tax revenues.
- Two Green Party candidates for governor, Laura Wells
in California and Rich Whitney in Illinois, have included a state-imposed
Tobin tax in their platforms. Both are also campaigning for state-owned
banks in their states, on the model of the Bank of North Dakota. People
around the world look to the United States for boldness and innovation,
and California and Illinois are two of the hardest hit states in the nation.
If those states manage to turn their economies around, they could establish
a model for economic sovereignty globally.