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How and why Wall Street had to decouple from Main Street and the real economy

By   Follow Me on Twitter     Message Richard Clark     Permalink
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What follows here is based on an article by Mike Whitney at http://www.informationclearinghouse.info/article25367.htm

Bush, Greenspan and many other high-ranking officials understood the problem with subprime mortgages and knew that a huge asset bubble was emerging from them that threatened the real economy. But while the housing bubble was more than just an innocent mistake, it wasn't caused by any kind of "conspiracy," which Webster defines as, "a secret agreement between two or more people to perform an unlawful act."

No, it's actually worse than that, because bubble making has become the predominant endeavor on Wall Street, and is being used by the financial elite to bypass the inherent 21st century structural problems of capitalism itself, mainly stagnation.

The main stakeholders in Wall Street's bubble-making agenda didn't need to convene any kind of conspiratorial meeting to decide on what they wanted or how they were going to get it. They already knew what they wanted; all they needed was a process that would help them maintain profitability even as the "real" economy remained stuck in the mud. And that process quickly became obvious to all of them. UCLA history professor Robert Brenner has written extensively on this topic and easily dispels the mistaken view that the real economy is "fundamentally strong" (as claimed by former Treasury secretary Henry Paulson).

Here's Brenner's explanation:

"The current crisis is more serious than the worst previous recession (1979- 1982) of the postwar period, and could conceivably come to rival the Great Depression. Economic forecasters have underestimated how bad it is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relies on asset price bubbles. In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was only about a third of the increase in the previous period, and was a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II. Economic growth was driven entirely by personal consumption and residential investment, which would not have been possible without easy credit and rising house prices. Economic performance was weak, even despite the enormous stimulus from the housing bubble and the Bush administration's huge federal deficits. Housing by itself (it's growth fueled by the newly relaxed requirements for getting a mortgage) accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was, therefore, to be expected that when housing prices stopped going up and the housing bubble burst, wages, consumption and residential investment would fall, and the economy would plunge." (Wages were simply too low to allow workers to buy enough of what was being produced.)

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(Source: "Overproduction, not Financial Collapse, is the Heart of the Crisis," Robert P. Brenner speaks with Jeong Seong-jin, Asia Pacific Journal) Click here

What Brenner describes is a "real' economy that's flat on its back, an economy that -- despite unfunded tax cuts, massive military spending and gigantic asset bubbles -- can barely produce enough to be described as "positive growth.'

The problem for the banksters was (and is) that the pervasive lethargy of our mature capitalist economy poses huge challenges for industry bosses who are judged solely on their ability to boost quarterly profits. Goldman's Lloyd Blankfein and JPMorgan's Jamie Dimon could care less about economic theory and the vitality of the real economy; what they're interested in is making money by the most lucrative means available. All they care about is how to deploy their capital in a way that maximizes return on investment. "Profits," that's it. Nothing else matters, least of all the real economy, which they no longer need to bother with.

The origins of Wall Street's new alternative financial universe

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Maximizing profits is much more difficult in a world that's saturated with overcapacity and flagging demand, as ours is. In general, the world now tends not to need more widgets or widget-makers. Therefore, the only way to ensure profitability was to invent an alternate money-making system altogether, a new universe of financial exotica (CDOs, MBSs, CDSs) that operates independent of the sluggish real economy -- in short, a very profitable gambling casino in which the "smartest guys in the room" can systematically and repeatedly bilk the rubes. "Financialization" was just the ticket. It allows the main players to pump-up the leverage, minimize capital outlay, inflate asset prices, and skim off record profits even as the real economy struggles with, and endures, severe stagnation.

Financialization provides banksters an excellent and unprecedented path to wealth creation, which is why this sector's portion of total corporate profits is now nearly 40 percent. It's a way to bypass the now pervasive inertia of the production-oriented "real' economy. The Fed's role in this new paradigm is to create a hospitable environment (low interest rates) for bubble-making so that the upward transfer of wealth can continue without interruption. Bubblemaking thus became the new "standard operating procedure."

Scores of people knew what was going on during the subprime mortgage fraud fiasco

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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