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Hullabaloo


Friday, December 27, 2013

 
The entire economy is a house of cards waiting to tumble

by David Atkins

Yesterday Digby highlighted the outstanding piece by Matt Taibbi on HSBC executives avoiding even a second of jail time for engaging in blatant drug money laundering for major cartels.

The most shocking bit bears repeating:

Though this was not stated explicitly, the government's rationale in not pursuing criminal prosecutions against the bank was apparently rooted in concerns that putting executives from a "systemically important institution" in jail for drug laundering would threaten the stability of the financial system. The New York Times put it this way:

Federal and state authorities have chosen not to indict HSBC, the London-based bank, on charges of vast and prolonged money laundering, for fear that criminal prosecution would topple the bank and, in the process, endanger the financial system.

Now, there are a lot of people who read that statement and say "Bull." It's widely assumed on the right that this is just another example of liberal crony capitalism, that all we need to do is let capitalism and the legal system take their course, watch those liberal Brits and New Yorkers flounder, and the free market will take care of everything. Liberals tend to think that campaign finance, big bank lobbying, neoliberal ethics and big business corruption in general leads the justice department to make excuses for the failure to see justice done.

But I would posit a far more shocking conclusion: that the authorities actually believe it when they say such things. And an even more shocking conclusion: that they may well be right.

As I have argued again and again here at Hullabaloo, the modern economy is teetering house of cards propped up by wildly overinflated assets.

To make a long story short, the combined forces of globalization, flattening, deskilling and mechanization led to an inexorable downward trend in the power of wage earners in the labor market. Entire industries disappeared, employment stability decreased, wages shrank, jobs went to machines or to other countries for far lower pay, entry-level jobs became "internships", benefits shriveled, and so on. It didn't help that many countries (especially the U.S.) instituted intentional policies to benefit the rich and reduce their tax burden, but inequality has increased throughout the industrialized world to one degree or another regardless of governmental policy.

Instead of making harder choices, most policymakers took the easier way out of the quandary: increase asset values instead. Free trade deals lowered prices for goods at the expense of domestic labor; 401Ks replaced pensions to boost the stock market at the expense of retirement stability; credit cards and other lending vehicles were provided to ordinary citizens who couldn't make ends meet under normal circumstances (remember that in the 1950s most households got by entirely without credit!); the one-earner household norm was replaced with a two-earner norm at the expense of a variety of social ills; and, of course, since traditional savings vehicles, pensions, and the wages to fund them had been destroyed, huge housing incentives were created to push people into home ownership as their primary savings vehicle and hedge against inflation.

The result is the modern economy: a seemingly puzzling combination of record stock prices, record corporate profits, very strong housing prices and robust GDP gains, combined with rising cost of living, increasing unemployment in developed nations, insanely high youth unemployment rates and student debt, diminishing savings, entire industries disappearing with no hope of return, and minimal or even negative wage growth.

The entire economy is run by the asset classes on behalf of the asset classes. There's no money left in the real economy anymore, and the trends toward mechanization and globalization of jobs are only increasing at exponential rates, dramatically increasing the power of the asset classes at the expense of wage earners.

Most people don't have remotely enough money saved in retirement. What happens if the housing market that represents a huge portion of the most older middle class' retirement savings "crashes" to levels that would actually be appropriate to the buying power of middle class wages, particularly among younger Americans?

Most people don't have pensions. They have a 401K if they have anything at all. What happens if the stock market collapses to levels that are sensible and reflective of the real Main Street economy? It's not just the stockbrokers who go belly up. It's everyone with a 401K.

Most people need credit cards to make ends meet. What happens if the credit card companies can't lend because their overleveraged house of cards comes crumbling down? Economic disaster.

And the thing about overinflated assets is that it doesn't take much more than a sneeze to blow the whole house of cards over.

It's well-known that one of the functions of banks is to bring money that disappears into the black market, back out of the black market. Money laundering is illegal, but in a funny way it's also somewhat essential. It's less essential if you have a strong middle class. But in an economy entirely propped up by assets and investment liquidity, if bankers get imprisoned for laundering money in a way that puts a chill on black market asset processing, the Justice Department types might be entirely accurate in assuming that liquidity will freeze in a such a way as to send the economy into a tailspin. Remember that the Fed has been engaged in "quantitative easing" for years now, giving the banks loads of free money with zero percent interest rates. It still can't afford to take its foot off the gas pedal.

If that's a terrifying thought, it should be. This isn't a question of social and economic injustice. This is a question of an economy built on lies and mirrors, an economy whose sickness is so deep that even a small dose of justice to its asset classes could kill the patient.

Wage growth and reductions in income and wealth inequality are the only medicine that will nurse this dying patient back to health. Without it, even a small breeze like prosecuting some money launderers might be enough to snuff out the candle.



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