"Looting of America" Author Sees Opportunity in Meltdown

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They invented financial instruments to meet that demand. And the instruments they created are so amazing it would take, it took a book to kind of unwind it all, but they are so phenomenally detached from reality, they literally became a series of bets. And those chickens finally came home to roost on a lot of those bets. That's the third piece of it.

So the first piece was the productivity got detached from real wages. Money drifted to the top, and those people ran out of places to invest it and they start to invest in what I call "vanity finance."

DS: Can we stop at step two for a minute because I don't know if that's going to be clear to everybody right away. I don't know if it's clear to me. You say in the book as well, there's a line on p. 17 that stopped me when I read it that says: "There was so much money roaming the globe that it ran out of real economy investments. Instead, much of this massive surplus found its way into high finance."

And yet, we're trained, I think, to think of entrepreneurs and the investing class as driving innovation. Why some handful of these people 30 years ago couldn't have thought to create investments in infrastructure or in green jobs in better schools or in mass transit. What prevented the creation of real economy investment?

LL: That's a good question. But some of the things that you mention there are public real investments. That's not what, you don't invest in infrastructure and schools, education if you are a private investor. And you're also not likely to be able to by yourself break through on clean energy. That usually, you know, those, or alternative energy operations. That usually requires massive government investment.

What you're looking for as a private investor is a good investment and you'll be willing to speculate some on venture capital, and money did go there. In fact, the dotcom boom was fueled precisely by the money that was looking for a home.

But there was too much of it. You can only absorb in the private sector a certain amount of investment at a time. Otherwise it gets very, very risky, and if it's your money, that's not what you want to do. What you want is something that looks much safer, or at least moderately safe.

And so that financial instruments created by the financial community looked a lot safer. So, yeah, you put some money into new industries, into the dotcom boom, into securitized subprime mortgages as well, and then you start drifting into securities based on subprime mortgages that were designed to look like they were AAA-rated securities. That money, those kind of instruments attracted a whole lot of money.

Where that money could have gone, could have, should have gone, is precisely in infrastructure investment, education, energy, health care reform, but that's what the public sector is supposed to do. And the public, if you recall, taxes were dramatically cut, especially on the wealthy, so the money to do those wonderful investments wasn't there.

DS: So these investors who were looking for a safer place than risky new energy technologies or schools or things that tend to be public investments found investments that they thought were relatively safe but perhaps were not, were concocted with some fudging of numbers and some tricks and some fancy footwork that's discussed in your book, The Looting of America, that perhaps in the way that some victims of predatory mortgage loans were taken in, the highest level of investors were taken in. Am I reading that correctly?

LL: It's amazing, virtually everybody involved was taken in except the people who were, even the people actually who were marketing this stuff. See, the money is made by creating, packaging, selling, and reselling these instruments. The fees are embedded in it, so you make the money up front. And this was incredibly lucrative for the financial community.

Step by step the large financial institutions started making money hand over fist off the fees that these things generated, and as long as the economy was booming, especially the housing market going up and up and up, which turned out to be that which was being bet upon mostly during this period, but other things as well, as long as these things went up there was little chance of people losing their money, and the fees being made were enormous. The profits of the financial sector started to hog, became the most profitable sector of the economy, and it, I think at one point it almost hit 40 percent of all the corporate profits were in the financial community.

But it turns out as we're learning now, these profits were phony. For example, the nine largest financial institutions had, according to the New York times, in the three years prior to the crash this fall, had earned quote/unquote 300 billion dollars. And now they've lost all that. It's all gone. Except it was paid out. In other words, those companies are now, have now gone in the red equal to all the money they previously made. Of course, the money they previously made has already been paid out, half of which has gone to, you know, bonuses and salaries within those companies. And we're now making up the difference through the TARP program, and trying to salvage the economy from a great depression.

So, but it was phenomenally successful as it was going on. And the reason that the investors invested in these instruments was (1) that they had these good ratings and they paid a little bit more than, they were constructed that they paid a little bit more than a super-safe government investment, or comparable government bond. And when you've got a lot of money and you can make a half a percent more, you're making a lot more money.

DS: Right.

LL: They couldn't sell them fast enough. And they kept inventing new ways to create them, even when there were no underlying assets that were attached to them, which is, you know, a mind-blowing concept that I ran into as I was working on this book.

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David Swanson is the author of the upcoming book "Daybreak: Undoing the Imperial Presidency and Forming a More Perfect Union" by Seven Stories Press and of the introduction to "The 35 Articles of Impeachment and the Case for Prosecuting George W. (more...)

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