" After we buy you, we'll borrow it, based on the collateral of a debt-free Simmons."
That's the new paper economy. Buy creditworthy firms, and then use their creditworthiness as collateral for paying far too high a price. The firm that put down only $2 million for Simmons but actually paid $20 million, resulting in $18 million in debt, offered it for sale a year later for double or more, maybe $40 million. The buyer this time around said: "We have only $4 million in cash. We'll keep the $18 million mortgage, and then we'll take another $18 million in debt." Now Simmons, bought a second time and with its stock value way up, was in deeper debt. Six sales later, in the summer of 2009, just weeks ago, the company declared bankruptcy, fired half its workers, and discontinued its health plan, not because Simmons wasn't making a product Americans liked--it was still a terrific company--but because, bought and re-bought repeatedly, the debt put on the company by people who were taking paper profits out of it bankrupted it. That's the new capitalism.
It's the same with the banks. Buy up the derivatives market, facilitated by deregulation. The federal government as part of its democratic oversight had long regulated the banks, regulated stocks, to make sure capitalism didn't go off the deep end, so the bankers responded with new instruments that the government couldn't regulate, "derivatives." In the derivatives market, if 10 or 15 people can't pay their mortgages, those bad debts are put in a pouch and sold to investors. The houses were originally worth $10 million, but today they may be worth only $5 million or less, perhaps much less, because the owners have defaulted. Given their uncertain value, banks sell them for $4 million. If the price goes up, the investors will have made a million; if it goes down, that's too bad, but they can average things out. Banks were once prevented by law from doing this kind of business. No more.
During the period when the bubble was collapsing in real estate, literally trillions of dollars in derivatives and toxic debt were put on the market. The bankers didn't just make themselves a little pouch of bad debt; from time to time they'd unpack it and say: "We have 600 bad mortgages from Tennessee here and 6000 from New York there. Let's repackage them and resell them." Then maybe they repackaged three debt packages and put them into a secondary derivative and sold it. Today nobody, including the bankers, has the slightest idea of what all those derivatives--many times removed from an original set of defaults--are worth. When the government gave the banks money in last year's TARP bail-out, it didn't know either. "Here's a lot of money," said the Fed, "hope you're covered. But don't worry, if you're not and the derivatives turn out to be worthless, we'll put more money in and cover it; if they're worth more than you thought, you keep the profit." That's how the government bailout of the banks worked. Privatize profit, but socialize risk!
Part of all of this comes from the new notion that capitalism is exclusively about making paper profits from paper buying and sales from leveraging. You probably saw Jimmy Stewart in "It's a Wonderful Life" about the good old days when the local bank made nice loans to people in the name of a healthy community. But then there was a run on the bank, money had been lost, and the bank couldn't cover it. This happens in a big way nowadays. Originally, leveraging was such that bankers might have to keep 20 or 25 percent of what was in the bank to cover customers who might want their money back, and the rest they lent out again at a slightly higher rate than they paid customers. That's how banks make their profit. That's okay, you can't expect them to keep all their money under the mattress. They've got to buy and sell the money you deposit to make their profit. But they started thinking: "Why keep 20 or 25 percent in the vault? Why not 10 percent? Or how about 5 percent? Or how about no percent? Just lend it all out because we can make money, and depositors won't want it back since it's a growing economy." Then you've got a problem. Slowly the economy goes bad, and people start saying, "Give me my money," and the banker says: "Sorry, but I lent it out to somebody else. She defaulted, that debt was resold as a derivative, and now I just don't have the money anymore."
That's called overleveraging, and the global financial market became deeply overleveraged. Banks began to be in danger of falling apart. That's the point at which government said: "We have a choice. We can either let capitalism work the way it's supposed to--i.e., you took your chances, now you go under--or we can say that certain banks are too big to fail. Too much is at stake. If Lehman Brothers fails, maybe that's acceptable, but we can't let the next ones go." Chase can't fail, Citibank can't fail. Citibank in particular can't fail because Obama advisors Tim Geithner and Larry Summers and Bob Rubin were deeply involved in it. If you wonder why it was that Citibank, which was in worse shape than Lehman, survived and Lehman didn't, just look at who's Secretary of the Treasury right now.
The point is the new capitalism is no longer interested in looking out at the world and addressing need. Capitalism used to be deeply connected to invention and entrepreneurship. That was one of its strengths, because people could see that's how you made money. You found out what people need. If it's transportation, invent the automobile; if it's illumination, invent the light bulb. Nowadays the only thing you're looking for is how to make a profit. It doesn't have anything to do with what the companies are producing, and indeed, very often you put people out of business who are actually making the goods that people need. The move from a real economy to a paper economy and the decoupling of the capitalist economy from real human needs, from servicing what people need, are obviously connected.
That is connected to another feature, the privatization ideology, which in the past 30 or 40 years has taken hold of the imagination of Democrats, Republicans, Tories, and Socialists the world over. People began to think that if they had to choose between markets and government, they trusted markets more. At least up to two years ago that was the case, not just among Republicans but among Democrats, including Presidents Clinton and Obama. Because markets are decentralized and plural, they represent real people. Government is a big bureaucracy. Who knows, it may become a monopoly, with no real competition. So even today, when government is playing a weak role in pushing a pluralistic health system that will cover only about 32 million out of the 45 million Americans who need it, God forbid there should be a public option, even a modest one, to compete with the private insurance companies. Obama himself yielded without a fight, a hostage to privatization ideology--the notion that the private is what counts, the private is more important than the public, the private is more important than the state, consumers are more important than citizens. Consumers making private choices about what they want count much more than citizens discussing together what society and community need.
Think back to our discussion of global warming. Addressing global warming and climate change and putting curbs on CO2emissions have to do with the public not the private sphere. Sure I want to lower CO2 emissions, but am I going to wait around for the local bus to take me home at the end of the day? Anyway, didn't they discontinue that bus? There used to be one that serviced Great Barrington and Stockbridge and Lenox. But in a megacity like Los Angeles I have a set of choices at the airport. I can rent a Hummer, a Cadillac, a Prius, a Mercedes, or a Ford Focus. I can rent any number of cars. I have endless private consumer choices, but if what I'd like to do is take public transportation so that I don't have to drive, and it's also safer and gets me where I'm going faster, the response is, "You want to take what?" Public transportation doesn't exist. That public choice has been taken off the table, and we celebrate our freedom exclusively in terms of what kind of car we can rent. We're free if we can rent a Jeep Liberty, but we don't see ourselves as unfree if there's no public transportation.
That public choice was made right after World War II. Europe and America weren't so different up to the war although we were starting to look different with our individualist, wild-west kind of mentality. Then after the war we faced the fundamental choice of whether to build a fast interstate rail system like Europe's or to build an interstate highway system. During the first term of Eisenhower's presidency the Congress was faced with that choice. The decision, which might have gone either way if the rubber and steel and oil and auto industries weren't also voting, was to build an interstate highway system. That decision secured the future of the automobile and also, of course, the future of the rubber, steel, oil, car, asphalt, and cement industries in America. The more fundamental and important choice between public and private transportation was taken off the books.
It wasn't the automobile itself but rather the interstate highway system that made the suburbs possible. They grew quickly because the highways meant you could use your car to get places quickly. This mobility allowed people to move more easily from one place to another, which contributed to the destruction of social capital that Robert Putnam talks about. It wasn't only disposable diapers that became available, we had disposable lives and disposable cities as well. If you wear out a city, then you get in your car, drive to another one, and start over. That's how the Sunbelt--the South and the Southwest--developed. Our interstate highway system made that development possible, and ever since it was introduced we haven't had a public decision to make about transportation that's worth anything. All we have a choice about is what kind of car to drive. That's a private choice.
The same situation applies to where we shop, although New England's a little different; so are New York, Los Angeles, and Chicago. They have resisted big-box stores like Wal-Mart, but for most of America people opted to be consumers at Wal-Mart instead of the downtown shopping areas, and understandably so. Why? Because they go where they can get cheaper goods and a much wider diversity of goods. So they go to Wal-Mart--or Home Depot or Lowe's--as ordinary American consumers (although maybe not as Stockbridge or Massachusetts consumers), looking for cheap buys for the whole family. Sam Walton knew what he was doing. You can find what you need to feed your family, clothe your children and get all their supplies, build your sunroom, take care of your automobile. As a private consumer you have to like it, but here's the problem: There are hidden public costs in every private decision you make as a consumer. If you go to the Wal-Mart in, say, Mason City, Iowa--my family came from there--someone may say: "It's really too bad. Mason City used to have a wonderful little downtown, with retail shops, mom and pop stores, a movie theater. That's all gone now. Stores boarded up. No more picture show." What happened? Wal-Mart happened. The local retailers could not compete because they couldn't afford to offer Wal-Mart's prices. Every time you shop at Wal-Mart, you are condemning another American town with a population of between 5,000 and 50,000 to a quick death. You are undermining the social capital of America.
People love living in New England because of its wonderful towns like Stockbridge, but such towns continue to exist in part because we've kept out the big-box stores, and when we let them in, the towns go under. When I was a kid here in the 1950s, Pittsfield was a great place, vital exactly the way Great Barrington is today. But no longer. Pittsfield has been struggling for 30 years now. It's not only that GE left, it's that a mall opened in Cheshire, and the minute that mall was there, the little shops and big department stores like England Brothers started closing down. People said, as if it had nothing to do with them: "Oh dear, tsk, tsk, it's terrible. What happened?" What happened was they made a choice with their public licensing and zoning laws and private consumer interests to allow a big-box mall there, and that helped destroy Pittsfield by undermining community and creating all the problems we face today.
Here again is a private consumer choice that makes a lot of sense for us one person at a time, but for us as a community there are social consequences that we neglect to measure. Economists have an absurd word for the social costs of private decisions: externalities. Nothing external about them, however; they are deeply internal to everything that happens to our society, but it's a nice diversionary word. Milton Friedman helped to introduce that use of the word, casting every value that was not strictly economic as an "externality." The interstate highway system brought economic returns, but it was a cultural disaster, its "externalities" destroying our cities, destroying our families, destroying our communities.
You'll see this replicated again and again if you look at the kind of decisions we make as consumers. There are externalities involved with the automobile and with climate change. As consumers we make a whole series of decisions that make all the sense in the world for us in terms of our personal desires but make no sense in terms of the public cost, the social cost. Warming has a social cost, but it doesn't get reckoned into the price. A lot of people in Detroit and elsewhere--workers, union people, politicians--say it's too expensive to deal with warming. As if there weren't social costs built into warming that are far more expensive, but those aren't calculated. Gas would be $12 a gallon if you calculated the impact on the environment of the emissions caused by its use and then said that's part of the price. Economics itself would take care of this, but we'd have to find all sorts of alternatives that don't make economic sense because they're too expensive. Eight dollars a gallon, say, may still be cheap compared to $12 for the equivalent in alternative energy.
The economics of living in a country where people see themselves as consumers and not as citizens, where they make private choices without thinking about the social or public consequences of those choices, is part of what's wrong. It's part of what makes it so hard for the members of Congress and our President to make the wise decisions that, as Bill McKibben said, science dictates but that make no sense politically in a world where all the social costs are called externalities and all the things we pay for have a price that isn't factored into those externalities, which makes the goods seem cheap. Were we to include the cost of externalities in the cost of fossil fuel, it would become absolutely uncompetitive, even against the most expensive forms of alternative energy. What we need is a new metric, a new way of measuring true cost, and then making both citizens and politicians understand why we need it. In some ways that seems to me the most realistic way to go.
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