Agenda for a New Economy

by David C Korten

  Real investors commit funds and entrepreneurial energy to creating and growing businesses. People who buy and sell pieces of paper in hopes of making unearned gains on price movements are engaging in speculation, otherwise known as gambling, and those who hold the bets and distribute the winnings are bookies or dealers. Simply using honest language would help to distinguish between real investors creating real wealth and speculators creating phantom wealth with financial games.

  The con is so massive and sophisticated that even many of its most important inside players do not recognize themselves as accomplices in a fraud. They buy into the Edmunds fallacy described in chapter 2, believe they are creating real wealth, and convince themselves, in the memorable words of Goldman Sachs CEO Lloyd Blankfein, that they are “doing God’s work.”

  Four Wall Street Cons

  Boil it down to the basics and you see that Wall Street is in the business of operating four sophisticated, large-scale confidence games.

  • counterfeiting: It creates facsimiles of official money for private gain unrelated to anything of real value — facsimiles otherwise known as phantom wealth.

  • securities fraud: Selling shares in asset bubbles that are maintained solely by the constant inflow of new money is, in effect, a Ponzi scheme.

  • reverse insurance fraud: Insurance fraud by common definition occurs when the insured deceives the insurer. In reverse insurance fraud, the insurer deceives the insured. In Wall Street practice this involves collecting premiums to cover risks the insurer lacks adequate reserves to cover and then refusing to pay legitimate claims.

  • predatory lending: Using a combination of extortion, fraud, deceptive promises, and usury, predatory lenders lure the desperate into perpetual debt at exorbitant interest rates.

  Given Wall Street’s hold on lawmakers, these may all be perfectly legal, but phantom wealth is still phantom wealth, and a con is still a con.

  In three-card monte the dealer shuffles the cards so fast you can’t follow them, and talks even faster. Complex derivatives are a fast shuffle that makes it virtually impossible to follow the connection to any real value.

  What makes the Wall Street con so much better for the dealers than a typical street-level three-card monte con is that Wall Street dealers are able to bet on their own game using other people’s money and then manipulate the market outcome in their own favor, just as the monte dealer manipulates the shuffle.

  Some Wall Street observers suggest that the big players like Goldman Sachs have the ability to use their capacity for microsecond trading to move markets at will, both to extract speculative earnings and to send a warning message to politicians who propose actions they want to kill.1 They further rig the game by rewarding themselves with huge bonuses when they win and taking billions in taxpayer bailouts when they lose. It sure beats being a dealer on the street or in Vegas.

  Unfortunately, no magic wand can convert the phantom-wealth expectations created by Wall Street to the real wealth we must have to meet our retirement needs for real food, shelter, and medical care; treat our ailments; or make us whole after a fire or collision. In the real world, there is no way to fulfill the promise of the mythic dream that Wall Street has so skillfully cultivated. These needs can be met only by people and organizations engaged in producing real-wealth goods and services.

  Using taxpayer money to make good on false promises — that is, to make whole those whom Wall Street has defrauded — only shifts the burden from those who once had enough money to play the Wall Street game onto those who did not play.

  Here is what we can do as part of the economic restructuring outlined in chapter 13.

  RECOVER THE LOOT AND SHUT DOWN THE TABLE

  We can start by recovering from the Wall Street con men what we can of their unearned phantom loot and encouraging them to take up honest work by rendering their schemes against society either illegal or unprofitable. Here are a few suggestions:

  1. Legislate an outright prohibition against selling, insuring, or borrowing against an asset not actually owned by the seller or issuing any security not backed by a real asset. With a little investigation, competent regulators can surely come up with a longer list, but you get the idea — and yes, these are all common Wall Street practices that generate substantial quantities of phantom wealth, distort markets, and create instability.

  2. Place strict limits on how much a financial institution can borrow in order to buy a property, and establish reserve and capital requirements for institutions in the business of selling insurance of any kind.

  3. Regulate bond-rating agencies and impose strict penalties for fraudulent ratings.

  4. Impose a small financial-speculation tax of a penny on every $4 spent on the purchase and sale of financial instruments such as stocks, bonds, foreign currencies, and derivatives. This would have no consequential impact on real investors making long-term investments in real businesses and assets. But it would discourage extremely short-term speculation and arbitraging (the simultaneous purchase and sale of the same asset in different markets to profit from fleeting minuscule price differences).2

  5. End the preferential tax treatment of hedge fund manager compensation. Currently, an obscure tax loophole allows hedge fund managers to report their billion-dollar compensation packages as capital gains, taxed at only 15 percent, whereas the wages of real workers are taxed at much higher rates.

  6. Assess a significant surcharge on short-term capital gains to make many forms of speculation unprofitable, stabilize financial markets, and lengthen the investment horizon without penalizing real investors. The capital gains surtax on profit from the sale of an asset held less than an hour should be 100 percent. For assets held less than a week, it might be as high as 80 percent, perhaps falling to 50 percent on assets held more than a week but less than six months.

  Opponents will claim that such taxes will stifle financial innovation. Good. That is the intention. We should not be providing incentives to financial predators to come up with ever more innovative forms of theft.

  FREE THE DEBT SLAVES

  Debt slavery is an ancient institution that traces back to the beginning of Empire. In earlier times, it was more explicit and visible, because it was more personal. The hapless borrower became the bonded servant or slave of the lender — a condition that prevails today in many low-income countries. In the contemporary United States, it is more systemic and less personal.

  Indentured service, a condition in which servants are not at liberty to negotiate the terms of their labor or leave their masters, played a major role in the economic history of the United States.

  At the time of the settling of the North American continent, land in Europe was scarce and its ownership concentrated. Surplus labor kept wages low and unemployment high. Tales of America’s vast fertile lands and great wealth free for the taking stirred the imagination of Europeans of all classes, but especially the poor and starving whose home-lands afforded them neither land nor employment.

  Those unable to pay for passage to the New World agreed to commit to a period of indentured service to whomever was willing, on their arrival, to pay their debt to the ship captain who provided passage. Many a young woman voluntarily became the wife of whatever man paid the captain’s fee. Once married, a woman and all she owned, acquired, or produced became the property of her husband. The status of an indentured servant differed from that of an outright slave mainly in having a promised date of release.

  Following the Civil War, blacks were technically free, but whites owned the land and controlled the jobs on which blacks depended for survival. Continuing the imperial pattern, the rights of owners continued to trump the rights of workers as the moneylenders stepped in for the kill. Blatantly unfair sharecropper arrangements forced blacks into debts that became an instrument of bondage only one step removed from an outright return to slavery.

  In the period following World War II, full employment and high wages for working people, combined with high taxes for th
e rich, created the celebrated American middle class. For a historically brief period, debt slavery became a relatively rare condition, at least for whites. Then, as Wall Street fundamentalists gained control, they weakened unions and outsourced jobs to create a downward pressure on wages while increasing the use of sophisticated advertising to promote ever more extravagant lifestyles and the use of credit card debt to finance them.

  As wages continued to fall relative to the cost of living, Wall Street promoted credit card and mortgage debt as the solution. Some people responded out of sheer desperation to put food on the table. Innocents simply bought into Wall Street’s enticements to consume now, pay later. People were soon locked into ever-growing debt they could never repay, and Wall Street’s take from whatever pittance they were able to earn increased, as did the total share of income going to those who lived off Wall Street profits relative to those who did honest work. Thanks to Wall Street’s control of the political system, this kind of indentured servitude is not only mostly legal but also is enforced by a legal system that favors the rights of property over the rights of people.

  In a related move, Wall Street pressed for tax breaks for the rich and an expansion in military spending. The government began running up record deficits. To make up for the lost tax revenues, the government borrowed from the rich what it had formerly raised from them in taxes — much as working people were borrowing from the rich to make up for inadequate wages. Government also became a debt slave to Wall Street.

  When Wall Street got in trouble, Washington, suffering from what we might call battered-slave syndrome, responded with a bailout paid for with money it borrowed from Wall Street courtesy of the Federal Reserve.

  Regulating the abusive slave masters to reduce fraud and place limits on their excesses seems a positive step within the established frame. It reduces the deception and the pain of the indebted. On the downside, it lends a patina of legitimacy to Wall Street and helps deflect the public outrage that might otherwise provide political support for a more serious system transformation.

  The proper goal is not to make debt slavery safer and more comfortable. It is to eliminate such slavery by raising the wages of working people and the taxes of the moneylenders while rethinking our approach to meeting a variety of needs to which Wall Street offers itself as the solution.

  RETHINKING HOW WE DEAL WITH REAL FINANCIAL NEEDS

  Money may be nothing but a number, but survival in a modern society is impossible without it. There are, however, better ways to deal with our very real financial needs than those presently offered by Wall Street.

  Let us look at alternatives for consumer credit, home mortgages, insurance, retirement, and equity investments. Be forewarned that what follows is not a self-help primer on managing your money and securing your retirement. Rather, it is a primer on why the options available won’t meet your needs and what we need to do as a society to change that.

  Consumer Credit

  Credit and debit cards have two distinct functions: clearing transactions and providing an open line of credit. The use of debit and credit cards to clear transactions is a straightforward and beneficial service if properly regulated and transparent. The use of either as an open line of credit, particularly to pay for current consumption, is an enticement to debt slavery and an instrument of predatory lending.

  To maintain the convenience of paying with plastic as a substitute for writing checks, New Economy community banks, savings and loan associations, and credit unions can form a transaction-clearing system owned cooperatively by its member institutions. The largely nonprofit system can operate as a transparent and publicly accountable regulated public utility.

  Financing for large durable purchases such as a home, car, or major appliance can be arranged on a case-by-case basis with a local bank, savings and loan, credit union, or even the local merchant from which the purchase is made.

  In my youth, I worked for a time in the credit department of my dad’s music and appliance store. My dad loved making money, but that love was always second to the commitment at the core of his identity to provide reliable products and services to the people of the community in which we lived. In my experience, this is typical of small-business owners who have strong community roots.

  At what by current standards was a very modest interest rate, we offered a one- to three-year payment plan for major purchases such as a piano or refrigerator that would serve for many years. We retained title to the merchandise until all payments were received, and our primary recourse was to repossess if the buyer defaulted. If customers who demonstrated good faith ran into temporary difficulty from an illness or business downturn, we noted this on the accounts and generally worked out some arrangement that would allow them to keep the merchandise and pay as they were able. There were no penalties or special fees.

  We financed this service with a commercial line of credit from our local bank, secured by our customer accounts receivable — promises to pay from people we knew and on whose future business we depended. We made the decisions and carried the risk. It was an arrangement that encouraged responsible decision making on all sides.

  The solution to wages inadequate to provide for daily needs is not easier, cheaper, or fairer credit; it is to restore living-wage jobs, tax the rich to provide a floor of essential public services, and reduce household expenses by restoring the household as a unit of production.

  We restore living-wage jobs by rolling back ill-conceived trade policies that encourage the international outsourcing of jobs and the suppression of wages, by raising the minimum wage, and by generally making the provision of living-wage jobs for all who seek them an economic policy priority.

  We restore basic public services by taxing the rich commensurate with the benefits they have received from society and by rolling back wasteful government expenditures on military adventurism and corporate subsidies.

  We restore household production by reorganizing our lives so we devote less time to paid employment and more to undertaking many of the things at home that we have outsourced to the money economy, such as gardening, food processing, meal production, lawn care, handyman tasks, entertainment, and child care.

  The restoration of household production has received a major boost from an economic downturn that leaves many people with more time than money. Others, particularly youth, are pioneering this path by choice and discovering how to do it in ways that are both highly fulfilling and consistent with an appropriate commitment to balanced gender roles and work sharing. I’m a fan of Shannon Hayes’s Radical Homemakers: Reclaiming Domesticity from a Consumer Culture,3 which shares the stories of these modern pioneers and the lessons of their experience.

  To sum it up, the appropriate cure for systemic debt slavery is a New Economy.

  Home Mortgages

  The purpose of a mortgage is to finance homeownership, not to create a foundation for loan pyramids, fuel speculation, and inflate a housing bubble. The idea that the inflation of housing prices is creating wealth is only one of many phantom-wealth fictions. It may increase the relative advantage of homeowners over renters, but escalating home prices create a growing barrier to first-time homeownership. And using one’s home as a substitute for a paying job to support current consumption is a path to serfdom.

  The goal of broad participation in responsible homeownership is best advanced by increasing job security, raising wages, and maintaining stable housing prices. We also can create a system of responsible mortgage lending, much like the one we once had.

  That system consisted of local financial institutions, primarily member-owned savings and loan associations, that served as repositories for local savings and issued mortgages to homebuyers with the backing and strict supervision of various federal agencies. It worked well until deregulation of the financial system broke down the carefully calibrated division of responsibilities among local financial institutions and opened the door to increasingly risky and predatory behavior.

  It is time to
restore a system of well-regulated community banking to serve a variety of community needs for legitimate and responsible financing, including homeownership.

  Insurance

  Insurance involves an arrangement by which a group of individuals join a risk pool to guarantee one another against individual ruin from a catastrophic illness, fire, or other random, unavoidable event.

  There are three basic approaches to organizing an insurance pool.

  1. PRIVATE NONPROFIT: A number of people or institutions voluntarily form a mutual insurance association that pools the risks for certain disasters or life events, such as fire, flood, or disability. Each member of the pool takes on the roles of both insurer and insured in a community-based mutual security arrangement grounded in cooperation, caring, and sharing. Any excess in premiums collected over the cost of the claims paid plus appropriate reserves is returned to the policyholders. Often identified by the word mutual in the name, as in Mutual of Omaha, this type of association was once the most common way of organizing insurance services.

  2. GOVERNMENT: A government insurance program such as Social Security or Medicare organizes and manages a mutual pooling of risk on a national scale. Coverage is mandatory, which assures universal coverage, spreads the risk over a large number of people, and minimizes the costs of recruitment and administration.

  3. PRIVATE FOR-PROFIT: A private, profit-seeking individual or entity offers to insure against specified risks in return for a fee. This creates a sharp divergence between the roles and interests of the insurer and insured. Both, of course, would prefer to avoid a loss, but the insurer wants to maximize fees and minimize the payment of claims, whereas the insured wants the opposite. This conflict of interest encourages the insurer to exclude those in greatest need and to find excuses to reject legitimate claims. It also carries high overhead costs to cover dividends to shareholders, executive bonuses, marketing campaigns, claims processing, and disputes over denied payments. The results can be disastrous, as is the case with the U.S. private health insurance industry.