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- Doug Casey on Taxes and Freedom
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- To the Class of 2012
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How the Servant Became a Predator: Finance’s Five Fatal Flaws
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist who has spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Originally published at New Deal 2.0
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What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.
1. The financial sector harms the real economy.
Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large. The finance sector is an intermediary — essentially a “middleman”. Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector’s parasitism.
Second, the finance sector is worse than parasitic. In the title of his recent book, The Predator Statehttp://books.simonandschuster.com/Predator-State/James-Galbraith/9781416566830, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation. The facts are alarming:
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Consumer Spending Grows Faster Than Paychecks
WASHINGTON — U.S. consumers boosted their spending in February by the most in seven months, raising expectations for stronger growth at the start of the year.
Americans spent more even as their income barely grew. To make up the difference, many saved less.
Consumer spending rose 0.8 percent last month, the Commerce Department said Friday. The biggest increase since July coincided with the best three-month hiring stretch in two years.
The jump in consumer spending helped Wall Street close out its best first quarter since 1998. More spending also led economists to upwardly revise their economic growth estimates for the January-March quarter.
Paul Dales, an economist at Capital Economics, now expects annual growth for the first quarter to be around 2.5 percent, compared with earlier estimates of about 2 percent. Consumer spending drives roughly 70 percent of economic activity.
Some of the higher spending last month reflected surging gas prices. But consumers spent more on other goods and services, too. After excluding inflation, which was due mainly to gas prices, spending rose a solid 0.5 percent.
Many Americans are spending more freely after the economy added an average of 245,000 jobs a month from December through February. That’s lowered the unemployment rate to 8.3 percent, the lowest in three years. Most economists expect similar job growth in March.
Still, the hiring gains have not resulted in bigger paychecks for most people. Income grew just 0.2 percent last month, matching January’s weak increase. And when taking inflation into account, income after taxes fell for a second straight month.
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Personal Saving Rate Plunges As Americans Get Back To Spending More Than They Earn
Back in the good old days of the mid-2000s, before that whole unpleasantness with the global financial crisis and the near-depression and what have you, Americans lived like kings. Kings, I say, with big-foyered mansions and six-wheeled Humvees purchased entirely with borrowed money because being fiscally prudent is the sort of thing terrorists do.
Then when the whole near-depression thing hit and the banks repossessed our mansions and Humvees, we were forced to live like cave-dwelling Taliban, “saving” our money instead of spending it. When we had money, that is.
Well, those days seem to be over. We’re back to spending more money than we earn. Yay?
The Commerce Department reported this morning that Americans jacked up their spending in February by 0.8 percent from the month before, even while their incomes only increased 0.2 percent. Take inflation into account, and we actually lost money in February, the third decline in the past four months, while still managing to raise inflation-adjusted spending at the fastest rate since September. Boom. Take that, Osama’s ghost.
As a result of this kick-ass mismatch between spending and income, the personal saving rate, which is the government’s measure of how much Americans save — the percentage of disposable income we don’t blow on lottery tickets and smokes — tumbled to 3.7 percent, the lowest rate since a similar 3.7 percent back in August 2009.
To find a lower saving rate, you have to go all the way back to December 2007, when the rate was just 2.6 percent. Hmm, what’s special about December 2007? Well, that’s when the recession officially began, according to the National Bureau of Economic Research.
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The Fed Obliterates the Savings Ethic
Depression babies learned early that “saving for a rainy day” was not something one hopes to do but a requirement. The saying originated when most people worked on the farm. And when it rained, the fields were too wet to plow, and the farmer — not to mention the hired hands — made no money.
Of course, my grandfather was the diligent sort who would use rainy days to do required maintenance on his implements, noting with derision other farmers who spent rainy days at the bar in town. He believed they would surely end up with broken equipment when the sun would reappear, keeping them from making hay.
So the idea of savings is not necessarily the return one receives on the money that’s socked away, but the piece of mind that, when the weather doesn’t cooperate, the saver has a little stash to tide him over. Of course, the vast majority of us don’t have to worry about the weather.
But an economic storm hit a couple years ago and plenty of people have not had work, rain or shine. Those who took heed of that old saw have no doubt weathered the storm better than those who didn’t. Most financial advisors recommend that a person have three month’s worth of living expenses saved — and some say six months worth, just in case. But how many people heed that advice?
There is no caveat to the counsel that says, “Keep six months of savings around if the money is earning at least six percent.” Even if the money sits there all shiny, not earning a thing, it’s the liquidity and insurance against the unknown that’s the issue.
Unfortunately, a central bank’s debauchery of the currency serves to raise people’s time preferences and impair their judgment. In a blog post recently, I highlighted the advice of life coach and author John P. Strelecky, who advises people to spend their tax refunds on an experience they will remember forever, rather than saving the few hundred or thousand dollars that the IRS may be giving back.
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Break Up the Big Banks, Says the Dallas Fed
As the Supreme Court shows every sign of throwing out “Obamacare” and leaving 30 million Americans without health insurance, another drama is being played out in the quiet corridors of the Federal Reserve system that may affect even more of us.
Taxpayers will be on the hook for another giant Wall Street bailout, and the economy won’t be mended, unless the nation’s biggest banks are broken up.
That’s not just me talking, or the Occupier movement, or that wayward executive who resigned from Goldman Sachs a few weeks ago. It’s the conclusion of the Dallas Federal Reserve, one of the most conservative of the Fed’s regional banks.
The lead essay in its just released annual report says a cartel of giant banks continues to hobble the recovery and poses an ongoing danger to the economy.
Wall Street’s increasing power remains “difficult to control because they have the lawyers and the money to resist the pressures of federal regulation.” The Dodd-Frank act that was supposed to control Wall Street “leaves TBTF [too big to fail] entrenched.”
The Dallas Fed goes on to argue that the Fed’s easy money policy can’t be much help to the U.S. economy as long as Wall… Continue reading
Dollar Alternative Anyone?
Countries around the world have been actively seeking ways to not do business in dollars for the past few years. The U.S. dollar is the so-called world reserve currency, but the big question is for how long? China and Japan are beginning to shun the dollar in trade between the two countries. Mind you, this is the 2nd biggest economy in the world doing business without dollars with the 3rd biggest economy in the world. Russia and China, also, have an agreement tonot use the dollar, and even India recently announced it would trade gold for oil with Iran. Additionally, the International Monetary Fund (IMF) has been calling for an alternative to the buck. The big push is not because the U.S. dollar is held in the highest regard but because it is losing its luster on the world stage. After all, the debt debacle facing America is worse than what the Greeks are facing according to a new report from U.S. Senator Jeff Sessions. Senator Sessions says every man, woman and child in the country is saddled with $44,000 in debt.
The difference is the U.S. can print money, Greece cannot, and that is the problem for the rest of the world. Every dollar that is created devalues the other dollars in existence. America spends 43 cents more than it takes in every year. There is a current $15 trillion national debt and future commitments that some economists say exceeds $200 trillion. Last August, Congress raised the debt ceiling $2.1 trillion to $16.4 trillion. That money is likely to run out before the November 2012 election, and then, Congress will need to raise it again or the U.S. will face default. My money is on yet another debt ceiling increase. Is there any wonder why the world wants to move away from the dollar? The more you have of something, the less it is worth.
