Tuesday, September 24, 2013

The Legacy of Lehman? Pottersville.

This month marks the fifth anniversary of the collapse of Lehman Bros. Which is a good time to reflect upon three pillars of the American economy we thought we knew:

1) Banks keep our money safe and also make loans to help us buy stuff.
Is there anybody out there who still believes this? Of course not, and here’s why. Imagine falling asleep in Bedford Falls and waking up in Pottersville. The Bailey Savings and Loan is long gone. So is good old George Bailey. You’re drowning. But George isn’t there to save you because Clarence isn’t there to save him. You see, in this nightmare there is no Clarence. Potter owns the bank, the town, and the country.
You missed a couple of mortgage payments. Potter foreclosed on your house and kicked you and your family out. You rented a room in a broken down building--which Potter also owns. To pay your rent you took a job at Potter’s Potables--the local liquor store. Since Potter pays less than minimum wage and no benefits, you had to go to Potter’s Payday Loans for an advance on your salary in order to make ends meet. The interest rate was 5000%---which made Potter rich enough to buy even more politicians who were only too happy to cut Potter’s taxes and change all the laws in Potter’s favor. It’s snowing. You’re on a bridge staring down into the icy black water. The only thing left of your American Dream is that small life insurance policy clutched in your trembling hand as Potter’s sarcastic voice echoes in your brain, “You’re worth more dead than alive.” This is the country we have built for our children. It’s not a wonderful life.
2) The stock market exists to help companies find capital.
Seriously? A guy wakes up one day and decides America needs widgets, and he’s just the one to make them. He goes downtown and finds a bunch of folks haggling in the square. He convinces some of them to give him money for his widget business. In exchange, they get shares of stock in his new widget company. Widget Guy uses the money to buy equipment and hire people. If he makes a profit, so do his investors. If he doesn’t, they don’t. Whether or not Widget Guy and his investors make money, lots of people get hired and paid in the process. And lots of real stuff gets bought and sold. That’s the way the market is supposed to work.
But Potter took over and screwed everything up. He went down to the square and convinced those investors that they were chumps for buying shares in Widget Guy’s company. After all, it takes time to build a successful business and who wants to wait that long to make money? Potter’s got a better idea. If investors like widgets so much, instead of giving money to Widget Guy, they should give it to Potter. He’ll find other investors and they can all bet with each other on the price of widgets. Potter’s the bookie. What fun. They can bet on Widget Guy’s stock price going up or down without ever giving him any money at all. And when they get bored with betting on widgets, Potter’s got a million other things they can bet on. The price of cars in China, the temperature in Sri Lanka, the rainfall in Iowa, or for that matter--anything else that moves. Every day Potter comes up with more exotic bets to suck all their investment capital out of the real economy.
How many bets is Potter booking while nobody’s looking? Let me put it this way. The federal budget deficit this year is down by half from four years ago. But it’s still humongous at three quarters of a trillion dollars. If you add up all the federal budget deficits over the last 200 years you get the national debt—which is about $16 trillion. At this very moment, Potter is holding bets (he calls them derivatives) worth approximately $600 trillion. That’s 37 times the national debt—all tied up in betting slips. And whether Potter’s clients win or lose their bets, Potter always wins because he gets a fee on every bet. Meanwhile Widget Guy never sees a penny. Oh, there’s one more reason why Potter always wins. If he guesses wrong, the rest of us have to cover his losses.
3) Everybody should pay their fair share of taxes.
Congress doesn’t even pretend to believe this anymore. Today, the official policy of the country is: tax wealth at a lower rate than work. Potter makes $10 million a year and pays less than half the tax rate of Widget Guy who earns $100 thousand a year. And that’s just the tip of a very dirty iceberg. Potter doesn’t pay a penny more in Social Security taxes than Widget Guy either--despite pocketing a salary that’s 100 times higher. On Capitol Hill, Potter decides what’s fair. On Wall Street, Potter decides what’s right. Widget Guy lives on Main Street.

In Pottersville, Main Street doesn’t have a chance.

"Our tears and our prayers are not enough. We're gonna have to change."