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WHICH SIDE ARE YOU ON? Return of the robber barons September 7, 2007 | Pages 4 and 5
SHARON SMITH shows how Wall Street's ruthless pursuit of profit bears an uncanny resemblance to the laissez-faire capitalism of a century ago.
"RUNNING A hedge fund means never having to say you're sorry," the Wall Street Journal observed on August 16, after managers of some of the nation's largest hedge funds informed stunned investors that they had lost up to a third of their money during the first two weeks of last month.
"When you've done your best, there isn't a great deal to apologize for," sniffed Jim Simons, manager of Renaissance Technologies, an enormous fund that lost nearly 9 percent the first week of August.
Now that the heady days of reckless betting using borrowed cash to obtain massive profits have predictably given way to more somber times on Wall Street, the arrogance displayed by the financial magnates responsible for the financial meltdown bears an uncanny resemblance to that of laissez-faire robber barons of a century ago.
Likewise, financier J.P. Morgan told the news media in 1901, "I owe the public nothing," after a stock market war he waged against rival J.P. Harriman ended in a financial crash, impoverishing thousands of investors.
The unfolding sub-prime mortgage crisis has finally begun to unmask the real victims of Wall Street's latest feeding frenzy, disguised as an economic recovery.
Mortgage brokers and predatory lenders long ago raked in their exorbitant fees and profits, while an estimated 2.2 million homeowners will face foreclosure in the coming two years. And while Goldman Sachs sunk $3 billion last month to bail out its ailing hedge funds, no such support will be forthcoming for the countless workers whose pensions and 401(k) plans were invested to the tune of billions in hedge funds now holding worthless sub-prime mortgages.
Even before the stock market crisis hit in August, a Wall Street Journal/NBC poll showed that more than two-thirds of Americans believe the country is either already in recession or headed for one over the coming year.
This is no wonder, since statistics released by the U.S. Census Bureau in August showed real earnings for year-round, full-time workers declining by more than 1 percent in 2006, falling for the third straight year of the present recovery--while an additional 2.2 million people, including 700,000 children, lost health insurance last year. The working class maintained household income by working longer hours for lower wages.
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To be sure, the "company store" no longer symbolizes the chokehold of employers over their indebted workers as it did 100 years ago. But it has been replaced by an entire industry of predatory lenders.
The rise of sub-prime mortgages over the last few years represents just one wing of the profitable "high-risk" lending industry dangling the promise of easy financing for everything from homes and cars to computers and televisions to the working poor.
As Business Week reported on May 21, "In 1989, households earning $30,000 or less a year paid an average annual interest rate on auto loans that was 16.8 percent higher than what households earning more than $90,000 a year paid. By 2004, the discrepancy had soared to 56.1 percent. Roughly the same thing happened with mortgage loans: a leap from a 6.4 percent gap to one of 25.5 percent...
"From 1989 through 2004, the total amount owed by households earning $30,000 or less a year has grown 247 percent, to $691 billion, according to the most recent Federal Reserve data available."
The Byrider car franchise, with 130 dealerships in 30 states, enjoys the backing of the Bank of America, while offering loans to low-income car buyers at interest in the range of 25 percent. When those buyers default on payments, Byrider then repossesses the cars to resell, pocketing whatever payments got made in the meantime.
Although Byrider's Albuquerque, N.M., dealership advertises "Good Cars for People Who Need Credit," half of its buyers' loans never get paid off, many of their cars repossessed.
Last year, Byrider reported net income of $828 per used car sold, compared with just $223 for used cars from new-car dealers. Byrider's sales last year totaled $700 million nationwide. "It's the finance business," Milwaukee Byrider manager Russ Darrow Jr. told Newsweek. "Cars happen to be the commodity that we sell."
Big banks such as Wells Fargo and U.S. Bancorp have joined in the success of payday loans to the poor, with terms that require $2 for every $20 borrowed--an annual interest rate of 120 percent based on a 30-day loan.
Indeed, today's mainstream economists continue to extol the virtues of the free market, placing blame only on its working-class victims. "The only feasible way to run a capitalist society is to allow companies to maximize their profits," George Mason University economist Tyler Cowen told Business Week. "That will sometimes include allowing them to sell things to people that will sometimes make them worse off."
Carl Steidtmann, chief economist for Deloitte Research, chastised ordinary consumers recently: "We will have to learn to live within our means...We're not going to be able to spend at levels well above our income levels."
Yet no attempt has yet been made to discipline the massive borrowing of the real culprits in the sub-prime mortgage meltdown--including entirely unregulated hedge funds.
As a McClatchy Newspapers report noted on August 7, "Some 7,500 hedge funds controlled $1.6 trillion in assets as of the end of June. That's equal to about 10 percent of the total value of the New York Stock Exchange. Much of what they own was bought with money they borrowed from big banks, sometimes up to 80 percent of their holdings."
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In recent years, the FHA found itself sidelined by private-sector sub-prime lenders offering seemingly "better deals" to low-income buyers. Now Bush has proposed that some homeowners facing foreclosure should be allowed to switch to lower-priced FHA loans--ensuring that their private-sector lenders are paid off, however predatory their lending policies.
"The government has got a role to play--but it is limited," Bush warned as he announced that he will allow the FHA to assist homeowners with good credit caught in the sub-prime mess. But just an estimated 240,000 homeowners will be able to refinance in the coming year--with a maximum of roughly 600,000 over the next three years.
"This is only going to skim the surface of the problem," commented Mike Van Zellingen of the Chicago-based not-for-profit Neighborhood Housing Services. "A million people are about to lose their homes, based on a conservative estimate. The typical homeowner in foreclosure is probably about five months behind on their mortgage, and their credit is going to be really bad. Very few are going to qualify for FHA."
The quest for profits among today's freewheeling capitalist class knows no bounds, with a range of government agencies watching their backs.
For example, when British Petroleum recently requested permission to break federal environmental guidelines in order to discharge 1,584 pounds of ammonia and 4,925 pounds of toxic sludge into Lake Michigan each day from its Whiting, Ind., oil refinery, regulators readily agreed, declaring that cutting its emissions would pose "an extreme hardship" on the oil conglomerate.
And the prison-industrial complex has begun to redefine the race to the bottom in U.S. wages, rivaling the role of convict chain gangs a century ago
For 20 years, the Arizona Department of Corrections--more recently assisted by its business development unit, Arizona Correctional Industries (ACI)--has been leasing its prisoners to labor for private agricultural firms. The ACI requires only that inmates be "paid a minimum of $2 per hour," according to the Christian Science Monitor. "Thirty percent of their wages go to room and board in prison. The rest goes to court-ordered restitution for victims, any child support, and a mandatory savings account."
The U.S. currently has the highest proportion of its population behind bars, including a prison rate of one in every eight Black men between the ages of 25 and 29.
As Daniel Lazare argued recently in The Nation, "The standard account of American economic development since the 1970s, told and retold in countless undergraduate classrooms, is that economic deregulation and growth have done much to narrow the once-yawning wage gap between white and black workers.
"To quote the New York Times: 'Unemployment rates among blacks and Hispanic people...are at or near record lows. Joblessness among high school dropouts has fallen to about half the rate in 1992. And wages for the lowest paid are rising faster than inflation for the first time in decades.'"
But, Lazares continues, citing Bruce Western's recent book, Punishment and Inequality in America, "if U.S. economic policies look good, it is only because the country's enormous prison population is not factored into the equation. If workers behind bars are counted, then...the real Black unemployment rate is up to 20 percent greater than official statistics indicate.
"Rather than freeing up the markets, Western writes, the United States has 'adopted policies that massively and coercively regulated the poor.'"
The robber barons would certainly approve.
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