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DESCRIPTION:Michael Perelman, a national known Marxist economist who teachs at CSUC 
 will be speaking at a Peace and Freedom Party forum in San Francisco on 
 November 12, 2008. He has also written an article titled "The Financial 
 Crisis Goes beyond Finance"\n\nSan Francisco Peace and Freedom Party 
 Presents:\nA Forum\n\nThe Financial Panic, The Causes and The 
 Solution\nwith \nAuthor\nMichael Perelman, CSUC Economics Professor and 
 Author of\n\nTHE CONFISCATION OF AMERICAN PROSPERITY\nFrom Right-Wing 
 Extremism and Economic Ideology to the Next Great Depression\n\nWednesday 
 November 12, 2008 7:00 PM\n522 Valencia St/16th St. 3rd Floor\nSan 
 Francisco, CA\n\n$5.00 Donation requested (no one turned away due to 
 financial need) strikers and unemployed Free\n\nSponsored By Peace and 
 Freedom Party, San Francisco\nFor more information call 
 (415)637-3787\nwww.peaceandfreedom.org\n\n\n\nhttp://mrzine.monthlyreview.org/perelman131008.html\n\nby 
 Michael Perelman\nThe Financial Crisis Goes beyond Finance\n\nThe crisis 
 today in mortgage lending does not come as a surprise to me.  I discussed 
 the build up to the crisis in a book published last year, The Confiscation 
 of American Prosperity.1\n\nThe book describes more than three decades of 
 concerted efforts to restructure the economy to respond to the 
 antiauthoritarian spirit of the 1960s.  Most important of all, the 
 counterrevolution to the 60s was concerned about a decline in the rate of 
 profits.  The objective was to remake the United States as a capitalist's 
 utopia with strict market discipline for ordinary people, while showing 
 special favors on business.  Tax cuts, deregulation, and a more 
 business-friendly legal structure became the order of the day.\n\nIn this 
 environment, the legal framework for union organization soon became 
 unfriendly.  Success showed up relatively quickly in the labor market, 
 where capital halted the increase of wages by 1972 -- the year when real 
 hourly wages peaked.  Since then wages have oscillated but never again 
 reached that level.\n\nProfits began to recover, but on closer examination 
 the recovery was unusual.  In competitive industries, profits were not 
 particularly high.  Profits in producing goods concentrated in industries 
 protected by intellectual property or government favoritism were better.  
 But the big profits came in finance.  Even major industrial firms, such as 
 General Motors, Ford, or General Electric began relying on their financial 
 divisions for much of their profits.\n\nWhat was happening?  According to 
 the textbook model of economic growth, new productivity translates into 
 higher wages, which, in turn, create more demand, which spurs industry to 
 produce newer or better products, increasing productivity.  In recent 
 decades, debt rather than income spurred demand.\n\nAs profits recovered, 
 more affluent people saw their portfolios increasing, creating what 
 economists call the wealth effect: the increasing value of their stocks, 
 and later of their houses, was treated as income, which generated demand.  
 Frequently, people used their houses to borrow money to support this 
 demand.\n\nProduction of physical goods was largely neglected.  I am 
 reminded of a conversation between Samuel Johnson and James Boswell, a 
 quarter millennium ago.  Boswell observed:\n\nVery little business appeared 
 to be going forward in Lichfield.  I found however two strange manufactures 
 for so inland a place, sail-cloth and streamers for ships: and I observed 
 them making some saddle-cloths, and dressing sheep skins: but upon the 
 whole, the busy hand of industry seemed to be quite slackened. "Surely, 
 Sir, (said I,) you are an idle set of people."  "Sir (said Johnson) "We are 
 a City of Philosophers: we work with our Heads, and make the Boobies of 
 Birmingham work for us with their hands."2\n\nJohnson, of course, was being 
 ironic.  The philosophers of the new economy were not.  They breathlessly 
 referred to a weightless economy.3  Tom Peters, the management guru, 
 derided old-line businesses as "Lumpy-object purveyors".4  Even Alan 
 Greenspan is fond of rhapsodizing about how modern production techniques 
 are making the economy lighter and lighter:\n\nThe world of 1948 was vastly 
 different from the world of 1996.  The American economy, more then than 
 now, was viewed as the ultimate in technology and productivity in virtually 
 all fields of economic endeavor.  The quintessential model of industrial 
 might in those days was the array of vast, smoke-encased integrated steel 
 mills in the Pittsburgh district and on the shores of Lake Michigan.  
 Output was things, big physical things.\n\nVirtually unimaginable a half 
 century ago was the extent to which concepts and ideas would substitute for 
 physical resources and human brawn in the production of goods and services. 
  In 1948 radios were still being powered by vacuum tubes.  Today, 
 transistors deliver far higher quality with a mere fraction of the bulk.  
 Fiber-optics has [sic] replaced huge tonnages of copper wire, and advances 
 in architectural and engineering design have made possible the construction 
 of buildings with much greater floor space but significantly less physical 
 material than the buildings erected just after World War II.  Accordingly, 
 while the weight of current economic output is probably only modestly 
 higher than it was a half century ago, value added, adjusted for price 
 change, has risen well over threefold.5\n\nNobody seemed to sense that 
 anything was awry.  Leaders in the U.S. were content to let the modern 
 equivalent of the boobies of Manchester produce their goods in Asian 
 sweatshops, and then borrow the proceeds from their masters to support 
 their consumption.\n\nThe game depended upon continued growth, whether 
 illusory or real.  Deregulation helped to promote illusions of prosperity.  
 So did the dot.com hysteria of the late 1990s.  When the bubble burst, the 
 Federal Reserve came to the rescue with low interest rates.  Temporarily 
 lacking sufficient confidence in the stock market, real estate seemed a 
 better bet.\n\nReal estate prices soared.  People could borrow more on 
 their houses.  And with rapidly rising real estate prices, people could 
 comfortably lend money to people who could not afford the loans because, 
 after all, real estate would always increase in value.\n\nTo make the 
 illusion even more solid, people believed that they could avoid risk.  
 Ratings agencies told investors that paper based on this real estate was 
 just a shade more risky than U.S. government bonds.  To seal the deal, 
 investors sold "insurance," which promised to cover losses if the 
 investment would go sour.\n\nThis insurance business was so brisk that the 
 amount of insurance sold was many times more than the face value of the 
 investments.  After all, selling this insurance was an easy way to profit 
 from real estate market, which was supposed to go nowhere but up.\n\nWhen 
 the music stopped playing, the regulators discovered that nobody was 
 watching the store.  Far more insurance was sold than the insurers could 
 afford to cover.  The ratings agencies were putting their seal of approval 
 on the paper to just get more fees.\n\nThe government now agreed to buy up 
 bad debt to the tune of $700 billion, bailing out both crooks and 
 incompetents.  The government debt will give the neoliberals excuse to cut 
 more programs to help needy people, while bailing out the 
 rich.\n\nSomething similar happened a few decades ago with another war, a 
 different Bush, and the same John McCain.  Many years ago, Lyndon Johnson 
 (who would have just celebrated his hundredth birthday this year) found 
 himself stuck in a war he couldn't win.  He also knew that, if he raised 
 taxes to pay for the war, the public would demand an immediate halt with a 
 fury that he could not resist.  Johnson relied on borrowing, which raised 
 interest rates.\n\nSavings and loan institutions, like the investment banks 
 today, borrowed short and lent long.  In this case, people put their 
 savings in the banks and the banks lent out money on 30-year mortgages.  To 
 prevent gouging and make mortgages affordable, the savings and loans were 
 prevented from paying interest rates high enough to keep depositors from 
 exiting, which could leave them bankrupt.\n\nThe Reagan administration, 
 including daddy Bush, moved to deregulate the savings and loans.  Given 
 this newfound freedom, crooks and nincompoops (including the current 
 President Bush's younger brother) rushed in to take advantage of profiting 
 from other people's money.  As the scope of this disaster was becoming 
 obvious, five senators, including John McCain along with Alan Greenspan 
 (perhaps the Godfather of the recent financial crisis), rushed in to defend 
 one of the more egregious savings and loan operations run by Charles 
 Keating.  Oh, yes, a small savings-and-loan in Arkansas, which was 
 connected with Bill Clinton (who later allowed Congress to deregulate the 
 current financial system, led by Senator Phil Gramm, John McCain's chief 
 economic adviser), also ran into difficulties.\n\nThe savings-and-loan scam 
 crashed leaving the government to pick up the pieces at a cost that is 
 still debated but was certainly well over $100 billion -- pocket change 
 today.\n\nThe difference today is that our politicians now promise 
 effective regulation this time around, just as they did with Sarbanes-Oxley 
 in the wake of crash of Enron and the rest of the dot.com boom.\n\nThe 
 Financial Side of the Financial Crisis\n\nThis crisis should be a teachable 
 moment, but speculative excesses are a part of the DNA of capitalism.  Leo 
 Tolstoy began his epic novel, Anna Karenina, with the famous observation, 
 "All happy families resemble one another, but each unhappy family is 
 unhappy in its own way."  Much the same can be said about depressions.  
 Each depression seems unique and subject to as many interpretations as the 
 most dysfunctional family.  Hence what is unique to this crisis is the way 
 that its build-up departs from the general textbook model.  Also, as I 
 mentioned above, the other defining characteristic of this crisis is that 
 debt rather than income spurred demand.\n\nFinancial assets demand a 
 different treatment.  Capital reacts with horror when wages increase, 
 demanding the Federal Reserve to slam on the brakes.  In contrast, soaring 
 prices of financial assets are presumed to be incontrovertible evidence of 
 a healthy economy.\n\nThe increasing value of these assets spurs people to 
 increase consumption, often taking on debt, confident that their assets 
 will appreciate even more. As Mark Twain observed about an earlier Gilded 
 Age: "Beautiful credit!  The foundation of modern society. . . .  'I wasn't 
 worth a cent two years ago, and now I owe two millions of dollars'."\n\nIn 
 2000, when the excesses and frauds of Enron, WorldCom, and the dot.com boom 
 came to light, financial markets shuddered.  The Federal Reserve came to 
 the rescue lowering interest rates, which reduced monthly mortgage 
 payments, allowing people to buy more expensive housing.\n\nOnce housing 
 prices begin to rise, housing becomes an investment as well as the source 
 of shelter.  In addition, people, who suffered losses during the dot.com 
 bust, saw housing as a safer investment than the stock market.  Housing 
 then transmuted into personal ATM machines, allowing people to borrow 
 freely on the rising value of their property.\n\nUnderlying this financial 
 froth, something more ominous was occurring.  Business refused to spend 
 much for investment in productive activities.  Again, the textbooks tell a 
 different story.  They teach that high profits translate into investment, 
 which creates jobs, spurring demand and making the economy grow.  Such was 
 not the case this time around.\n\nEarlier this year, the British financial 
 journalist, Martin Wolf, observed: "The US itself looks almost like a giant 
 hedge fund.  The profits of financial companies jumped from below 5 per 
 cent of total corporate profits, after tax, in 1982 to 41 per cent in 
 2007."6\n\nThis estimate is probably too conservative because many 
 nonfinancial companies increasingly depend upon finance.  General Electric, 
 and in their more prosperous years, Ford and General Motors, largely 
 depended upon finance.  Retail companies offer credit cards, in effect 
 selling insurance on their products in the form of extended 
 warranties.\n\nThe U.S. Department of Commerce reported that in 1992 about 
 a third of all workers employed in U.S. manufacturing industries were 
 actually doing service-type jobs (e.g., in finance, purchasing, marketing, 
 and administration).  Updating this work, needless to say, has not been a 
 high priority for government agencies.\n\nCorporations also spend 
 mind-boggling quantities of money just to purchase their own stock.  After 
 all, increasing stock prices boost executives' bonuses.  For years, Exxon 
 has been spending more money for stock buybacks than capital expenditures, 
 all the while whining that the company needs more incentives to drill for 
 oil.\n\nWhat investment does occur is largely financed by depreciation 
 allowances rather than previous profits.  John Bellamy Foster offers an 
 important measure of this reluctance to invest:\n\nNine out of the ten 
 years with the lowest net non-residential fixed investment as a percent of 
 GDP over the last half century (up through 2006) were in the 1990s and 
 2000s.  Between 1986 and 2006, in only one year -- 2000, just before the 
 stock market crash -- did the percent of GDP represented by net private 
 non-residential fixed investment reach the average for 1960-79 (4.2 
 percent).  This failure to invest is clearly not due to a lack of 
 investment-seeking surplus.  One indicator of this is that corporations are 
 now sitting on a mountain of cash -- in excess of $600 billion in corporate 
 savings that have built up at the same time that investment has been 
 declining due to a lack of profitable outlets.7\n\nFinance is attractive 
 for another reason: it employs relatively few people.  The 
 intriguingly-named FIRE sector, which includes finance, investment, and 
 real estate, employs only about 8 percent of the private labor force.  So, 
 8 percent of the workers generate 41 percent of the profits.  Massive 
 investments in information processing make such results possible.\n\nOf the 
 investment that does appear, finance may represent a disproportionate 
 share.  The government does not have recent data on types of investment by 
 industry.  The data do show that investment on information processing and 
 software is about 37 percent greater than investment in industrial 
 equipment and manufacturing equipment.  Of course, information processing 
 is also important in manufacturing, but the data is suggestive.\n\nWhere 
 Did The Money Go and Will Jobs Also Disappear?\n\nOn Monday, September 29 
 the stock market lost more than $1 trillion, about as much money as the 
 Gross Domestic Product for an entire month.  The next day, two thirds of 
 the value suddenly reappeared.  Yet, for the most part the tumult left most 
 people unaffected, at least for the moment.  More important, will the 
 evaporation of all of this wealth affect ordinary people?\n\nKarl Marx's 
 concept of fictitious capital is very useful in understanding these wild 
 swings.  I have explored this subject in more detail in an earlier book, 
 entitled Marx's Crises Theory: Scarcity, Labor, and Finance.8\n\nFor Marx, 
 capitalism uses markets to distribute labor into productive activities, but 
 it does so very imperfectly.  Part of the problem is that lack of knowledge 
 about the future causes imperfect investments.  These imperfections magnify 
 as the economy seems to prosper, making people become giddy about their 
 chances of success.\n\nCrises are capitalism's way of purging unproductive 
 investments.  In this way, crises eventually make the economy stronger, 
 unless they become so severe that they shatter the foundation of 
 capitalism.\n\nThe crises will become more violent if the distribution of 
 income becomes too lopsided, leaving investors flush with money, while 
 consumers are relatively strapped.  Massive amounts of money will flow into 
 speculative ventures, creating bubbles.  In effect, a market which is 
 supposed to be a wonderful feedback system to inform capitalists about the 
 needs of society, takes on a perverse logic of its own.\n\nEventually, the 
 bubble pops and there is hell to pay.  The question today is how extreme 
 this shock will be.  Capitalism has shown quite a bit of resilience in the 
 past.  What is happening now could turn out to be relatively mild or could 
 be severe.\n\nI use San Francisco as an analogy for my students.  There 
 will eventually be a serious earthquake that will do enormous damage.  
 Nobody can predict what will happen.  Even when the earth begins to 
 tremble, the severity of the event may be in doubt.\n\nWall Street uses a 
 somewhat related term, leverage, to describe the ability to magnify 
 potential profits by investing borrowed money.  When the economy begins 
 leveraging, business borrows money to invest -- not necessarily in 
 productive assets.  Leveraging can continue as long as people feel 
 confident enough to finance these investments.\n\nThe government's modest 
 limits on leverage have been systematically weakened, to the point where 
 investment banks would be putting up as little as 3 cents, and even less, 
 for each dollar invested.  The riskiness of such practice should be 
 obvious.  A mere 3% drop in the investment would wipe out the bank's own 
 share of the investment.\n\nThe Federal Reserve also promoted increased 
 leverage by holding interest rates low.  Other regulators also paved the 
 way for more leverage.  Companies that choose the path of lower profits and 
 lower risks are written off as stodgy and old-fashioned.  Their stocks will 
 flounder, reducing executive' bonuses.  So, Wall Street investors willingly 
 increased their leverage and risk.  After all, investors prefer companies 
 with high profits.  Few are willing to take the time or have the expertise 
 to understand the risks that might make profits appear high.\n\nIn Wall 
 Street-talk, increasing leverage works so long as investors maintain a 
 balance between fear and greed.  By fear, Wall Street means a reluctance to 
 take on too much risk.  Although Wall Street normally applauds greed, it 
 associates excess greed with a foolhardy approach toward risk.  During 
 euphoric times when fear of risk subsides, people put money in ridiculous 
 schemes.\n\nIn his delightful book, Charles Mackay, related tales of shady 
 operators bilking early investors a few centuries ago.  One projector set 
 up a company to profit from a wheel for perpetual motion.  Another 
 projector proposed\n\n"A company for carrying on an undertaking of great 
 advantage, but nobody to know what it is." . . .  Next morning, at nine 
 o'clock, this great man opened an office in Cornhill.  Crowds of people 
 beset his door, and when HE shut up at three o'clock, he found that no less 
 than one thousand shares had been subscribed for, and the deposits paid.  
 He was thus, in five hours, the winner of 2000 pounds.   He set off the 
 same evening for the Continent.  He was never heard of again.9\n\nThe 
 newfound wealth during times of growing leverage can create more demand, 
 which can increase jobs and wages.  As noted previously, such has not been 
 the case.  Speculative wealth has not produced growth in wages for ordinary 
 people or any significant growth in jobs.  In fact, cutting jobs to 
 increase profits has been a major factor in sustaining the boom.  A few 
 years ago, the business press praised this practice as financial 
 engineering, as if it were providing a productive service.\n\nOne factor 
 that contributed to the lopsided economic growth without jobs, which 
 characterized the recent decades, is the practice of leveraged buyouts.  
 Private equity companies, as they are known, buy up other companies using 
 borrowed money, often based on the assets of the target companies.  The 
 takeover artists claim that they can create managerial efficiencies, making 
 their takeover look attractive to potential investors.  In reality, they 
 charge their targets exorbitant fees, often paid for by debt that the 
 companies must eventually pay back.  Then, to cover this burden, the 
 companies must cut both wages and jobs, as well as looting significant 
 value from pension plans.  Private equity businesses then turn around and 
 sell these supposedly rejuvenated but actually hobbled companies to an 
 unsuspecting public, who fail to see the similarity between such 
 investments and the perpetual motion machine that Mackay described.\n\nIn 
 describing the necessity of a bailout for finance, the alarmists, who are 
 not necessarily wrong, point to the job losses associated with the 
 corporate restructurings that will follow bankruptcies.  But these 
 restructurings have been going on for decades.  The bailout, however, is 
 intended to facilitate a continuation of the destructive financial 
 practices, which have also caused significant hardship to 
 labor.\n\nObviously, a collapse will also harm workers and other ordinary 
 people, but in the wake of a collapse the country will stand a better 
 chance to restore some sanity to the economy.\n\nConclusion: Capitalism 101 
 (A Foundational Course)\n\nCapitalism is the most efficient system known to 
 mankind.  Central to this efficiency is the supposed ability of markets to 
 channel capital where it is most effective.  The current financial crisis 
 might be expected to throw some doubts on this dogma, but I do not expect 
 that to be the case.\n\nFor example, in 2001, in the wake of dot.com 
 bubble, the New York Times reported on one of the many excesses of the 
 period:\n\nIn the last two years, 100 million miles of optical fiber -- 
 more than enough to reach the sun -- were laid around the world as 
 companies spent $35 billion to build Internet-inspired communications 
 networks.  But after a string of corporate bankruptcies, fears are 
 spreading that it will be many years before these grandiose systems are 
 ever fully used.10\n\nAs mentioned earlier, the response was not to rethink 
 the system, but to double down lowering interest rates to re-ignite the 
 stock market.  Investors, the government, and even ordinary people 
 applauded the decision of Federal Reserve Chairman Greenspan, who appeared 
 to be the wisest man in the universe at the time.\n\nGreenspan's 
 manipulation of the interest rate appeared to be so beneficial because it 
 occurred without any direct effect on the proverbial taxpayer.  
 Parenthetically, why is it that this taxpayer ranks so much higher in our 
 concern relative to the workers who make everything possible?\n\nIn 
 retrospect, Greenspan's policy provided the fuel that helped to make the 
 current crisis more threatening.  Just as the solution to the dot.com 
 crisis produced the current crisis, the present bailout, if it works at 
 all, will create the preconditions for the next one.\n\nThe purpose of the 
 bailout is to create confidence.  Back in the 19th-century, the governor of 
 Illinois gave an excellent analysis of the way confidence worked in 
 financial markets.  He said that confidence "could only exist when the bulk 
 of the people were under a delusion and believed in a falsehood.  According 
 to their views, if the banks owed five times as much as they were able to 
 pay, and the people owed to each other and to the banks more than they were 
 able to pay, and yet if the whole people could be persuaded to believe this 
 incredible falsehood that all were able to pay, this was 
 'confidence'."\n\nHis words may perhaps be the most succinct analysis of 
 fictitious capital that I have read.\n\nNow class, here is the question for 
 all the students in Capitalism 101: explain to me how is it that markets 
 are so efficient in directing capital where it is most needed.  Extra 
 credit if you can do so without any giggles.\n\n \nReferences:\n\n1  
 Michael Perelman, The Confiscation of American Prosperity: From Right Wing 
 Extremism and Economic Ideology to the Next Great Depression, Palgrave 
 Macmillan (2007).\n\n2  James Boswell, Life of Johnson, 6 vols., Oxford 
 University Press (1934-64).\n\n3  Diane Coyle, The Weightless World: 
 Strategies for Managing the Digital Economy, MIT Press (1998).\n\n4  Tom 
 Peters, The Circle of Innovation: You Can't Shrink Your Way to Greatness, 
 Knopf (1997).\n\n5  Alan Greenspan, "Remarks" at the 80th Anniversary 
 Awards Dinner of the Conference Board, New York, October 16, 1996.\n\n6  
 Martin Wolf, "Why It Is So Hard to Keep the Financial Sector Caged," 
 Financial Times, February 6, 2008.\n\n7  John Bellamy Foster, "The 
 Financialization of Capital and the Crisis," Monthly Review, April 
 2008.\n\n8  Michael Perelman, Marx's Crises Theory: Scarcity, Labor, and 
 Finance, Greenwood Press (1987)\n\n9  Charles Mackay, Extraordinary Popular 
 Delusions and the Madness of Crowds (1852).\n\n10  Simon Romero, "Shining 
 Future of Fiber Optics Loses Glimmer," New York Times, June 18, 
 2001.\n\nMichael Perelman is professor of economics at California State 
 University at Chico, and the author of fifteen books, including Steal This 
 Idea: Intellectual Property Rights and the Corporate Confiscation of 
 Creativity, The Perverse Economy: The Impact of Markets on People and the 
 Environment, Railroading Economics: The Creation of the Free Market 
 Mythology, and The Confiscation of American Prosperity: From Right-Wing 
 Extremism and Economic Ideology to the Next Great Depression.  Check out 
 his blog Unsettling Economics (URL: ). This article first appeared 
 inRadical Notes on 7 October 2008, and it is reproduced here for 
 educational purposes.\n\n\n 
 https://www.indybay.org/newsitems/2008/10/14/18544520.php
SUMMARY:SF P&F Forum "The Financial Panic,The Causes and The Solution" with Michael Perelman
LOCATION:Wednesday November 12, 2008 7:00 PM\n522 Valencia St/16th St. 3rd 
 Floor\nSan Francisco, CA
URL:https://www.indybay.org/newsitems/2008/10/14/18544520.php
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