Thirty years since Wall Street’s “Black Monday”

By Nick Beams
19 October 2017

Thirty years ago today, on October 19, 1987, the New York Stock Exchange experienced what remains its largest one-day fall in history. On “Black Monday”, the Dow Jones fell 22.6 percent with the S&P 500 index dropping 28.5 percent for the period October 14-19.

The total loss of financial wealth during the crisis has been estimated to be around $1 trillion. But unlike 2008, the financial crisis did not precipitate a broader economic crisis and was over relatively quickly due to a major intervention by the US Federal Reserve, operating both directly and through the pressure it applied to major banks to extend liquidity to financial firms.

But that is not to say that its effects were transitory or that it merely represented some kind of brief malfunction in an otherwise sound financial system. In fact, what can be seen, both in the crash and the response to it, are the immediate origins of the processes that have led to the series of financial storms over the past three decades, the most serious, so far, being the crisis of September 2008.

The period leading up to “Black Monday” was one of great transition in the US economy and financial system, as well as globally. Whole areas of US industry were devastated by the high-interest rate regime, initiated by Carter appointee Paul Volcker as Federal Reserve chairman in 1979, a policy that was continued and deepened during the first years of the Reagan administration in the 1980s.

It was a process replicated around the world as key sections of industry, built up during the post-war economic boom, were laid to waste in what, to that point, was the most serious recession since the 1930s.

As industry was being destroyed, regulations that had been introduced to constrain the operations of finance started to be dismantled in order to clear the way for the accumulation of profit through speculative operations.

This was the start of the era of leveraged buyouts, using so-called junk bonds of dubious quality, in which whole firms could be gobbled up in hostile takeovers and then carved up and sold off at great profit. New financial instruments were developed to facilitate financial speculation that were to play a significant role in the 1987 crash.

In the lead-up to “Black Monday”, the Dow Jones index had raced ahead, rising by 44 percent in the seven months to the end of August, leading to expressions of concern that a financial bubble was being created. But despite these warnings, the speculation continued.

In 1985, the major industrial nations of the G6—France, the US, Britain, Canada, West Germany, Great Britain—had reached a deal (the Plaza agreement) to allow the US dollar to depreciate. But two years on, this was causing inflation concerns, leading to a new agreement, the Louvre accord, in February 1987, which was aimed at trying to halt the slide of the dollar and stabilise currency alignments.

However, in October 1987, Germany, which had agreed to keep interest rates low, moved to raise them due to inflation fears, causing the Fed to lift its discount rate to 7 percent and sending the rate on US treasury bonds to 10.25 percent. The shift in interest rates was the immediate trigger for the collapse of markets that was to follow.

With the announcement of a larger-than-expected trade deficit, a fall in the value of the dollar and fears that interest rates would rise, the markets began to fall from October 14. By the end of trading on Friday, October 16, the Dow was down 4.6 percent on the day and the S&P 500 had dropped by 9 percent in the previous week, setting the stage for what was to happen.

When international exchanges opened on Monday, before US trading began, it was a bloodbath in Asia and the Pacific as markets plummeted—the New Zealand market dropped by 60 percent.

The US market crashed from the opening bell in what was the first global financial sell-off. The plunge was exacerbated by a series of financial innovations that had been introduced in the previous years in order to facilitate speculation.

US investment firms had developed new financial products known as “portfolio insurance”. They were supposedly designed to protect investors from the effects of a downturn through the use of futures options and derivatives. The problem, however, was that they all operated on fundamentally the same model so that when the crash began there was a simultaneous rush for the exits.

Another factor was the introduction of computerised trading in which large numbers of stocks were sold, again on the basis of similar mathematical and financial models. Such was the volume of the trades that many of the reporting systems were simply overwhelmed. On the New York Stock Exchange, trade executions were reported up to an hour late, causing great confusion.

At the end of Black Monday, there were great fears about what was going to happen the next day. Before markets opened, the newly appointed chairman of the Federal Reserve, Alan Greenspan, who had taken over from Paul Volcker the previous August, issued a statement that was to become the basis of Fed policy from then down to the present day.

“The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system,” the statement read.

It was the beginning of what subsequently became known as the “Greenspan put”, understanding that the central bank would always be on hand to step in and support the financial markets.

The statement was backed up by action. In testimony given to the Senate Banking Committee in 1994, Greenspan said that “telephone calls placed by officials of the Federal Reserve Bank of New York to senior management of the major New York City banks helped to assure a continuing supply of credit to the clearinghouse members, which enabled those members to make the necessary margin payments.”

In 1990, Ben Bernanke, the future chairman of the Federal Reserve, noted that making such loans must have been a money-losing strategy from the point of view of the banks, otherwise Fed persuasion would not have been necessary, but it was a good strategy for the “preservation of the system as a whole.”

The extent of the intervention can be gauged from the fact that the lending of Citigroup to securities firms increased from a normal level of $200 to $400 million per day to $1.4 billion on October 20, after the bank’s president had received a call from the president of the New York Fed.

The policy of Fed intervention was to continue through the 1990s and into the new century. However, the fundamental contradictions of the capitalist financial system were not overcome but intensified. Consequently, when the crisis of 2008 struck, the Fed policy of leaning on the major banks was completely inadequate because it was the banks themselves that had either gone broke or were on the brink of collapse.

The Fed and other central banks around the world stepped in with massive bailouts and have sustained financial markets since then through their policies of financial asset purchases—quantitative easing—and ultra-low and even negative interest rates.

The outcome has been to neither restore economic growth nor create financial stability. Assessments of the price-earnings ratio of US markets have found that they are at elevated levels, exceeded only by 1929 and the dotcom bubble of the early 2000s. This is under conditions where economic growth, productivity and international trade—measures of the real economy—remain below their pre-2008 trends.

In 1987, the securities firms were bailed out by the banks. Little more than two decades on, the banks themselves had to be bailed out. But in another financial crisis, the central banks themselves will be directly involved because of their massive holdings of tens of trillions of dollars of government bonds and other financial assets.

In assessing the present situation, it is worth recalling an analysis made of the 20th anniversary of “Black Monday” by the Australian news outlet, the ABC—no doubt typical of many.

In the midst of a period of economic growth—the IMF had noted in 2006 that the world economy was expanding at its fastest rate for three decades—it cited financial analysts who maintained that a crash on a similar scale to 1987 was unlikely to be repeated. There was not the same interest rate structure and “we have a far more internationally coordinated banking system than was the case in 1987,” according to one of them.

“With rapid economic growth expected to continue in Asia,” the article concluded, “the market consensus appears to be that the bull run still has some way to go.”

Just 11 months later, in September 2008, the world was plunged into the deepest economic and financial crisis since the Great Depression of the 1930s.

http://www.wsws.org/en/articles/2017/10/19/blkm-o19.html

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Abolish the debt that is drowning Puerto Rico

We need to organize for immediate disaster relief for Puerto Rico–but we can also expose and oppose the debt disaster that came before the hurricanes.

Families begin to rebuild after the hurricane in Patillas, Puerto Rico (Andrea Booher | Wikimedia Commons)

Families begin to rebuild after the hurricane in Patillas, Puerto Rico (Andrea Booher | Wikimedia Commons)

SOCIALIST WORKER supports President Trump in his call to cancel Puerto Rico’s punishing debt.

We can pretty much guarantee you’ll never see the first five words of that sentence here ever again–and the supervisors of the “adult day care center” at 1600 Pennsylvania Avenue are obviously trying like hell to make sure we never have reason to.

But it says a lot about the Wall Street-made catastrophe that has plagued Puerto Rico for years before Hurricane Maria that even a reactionary fanatic like Trump didn’t think twice before stating the obvious.

“They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” Trump said in an interview last week with Geraldo Rivera of Fox News. “I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.”

“Wall Street promptly freaked out,” Politico reported the next day. That was an understatement. Heavy trading on the normally stable bond market pushed the value of Puerto Rico’s general obligation bonds–already devalued to 56 cents on the dollar after the island effectively declared bankruptcy earlier this year–down to 37 cents on the dollar.

The White House then “move[d] swiftly to clean up Trump’s seemingly offhand remarks,” Politico continued. Again an understatement. Office of Management and Budget Director Mick Mulvaney was rushed in front of a television camera to tell CNN: “I wouldn’t take it word for word with that.”

Just to make sure Wall Street got the message that no one in the Trump administration had any intention of doing what the head of the Trump administration had just said, Mulvaney was more explicit–and more contemptuous of the Puerto Rican people–in a second interview with Bloomberg: “We are not going to bail them out. We are not going to pay off those debts.”

Anyone want to bet that Trump doesn’t talk about “saying goodbye” to Puerto Rico’s debt again?

But the simple fact is that justice demands exactly that: The cancelation of all of Puerto Rico’s debt repayments, by the action of the U.S. government, taking responsibility for the Wall Street loan sharks who inflicted the damage in the first place.

Puerto Rico is caught in the same kind of debt trap that has ensnared poor countries in hock to the International Monetary Fund and World Bank–or more advanced economies like Greece, at the hands of European bankers and bureaucrats. The aim is to force vulnerable societies to knuckle under to the will of the ruling class.

And now, the devastation of neoliberal policies has made Puerto Rico’s crisis following Hurricanes Irma and Maria much, much worse.

People who want to show solidarity with Puerto Rico today will rightly focus on ways to provide immediate relief to communities desperate for food, water and critical supplies. SW hopes its readers will raise what money they can to donate to grassroots efforts–see the What You Can Do box with this article.

But we have another job to do now, while Puerto Rico lingers in the media spotlight: expose the debt trap that made the island more vulnerable when Maria struck and demand that it end.

– – – – – – – – – – – – – – – –

IN MAY of this year, Puerto Rico’s government went to federal court to file for the equivalent of bankruptcy on a debt that includes over $74 billion in repayments on government bonds and $49 billion in pension obligations. But in return for immediate relief, Puerto Rico will have to abide by even harsher austerity dictates.

The debt burden–which is larger than the annual economic output of the island when pension obligations are added in–is one consequence of a recession that has lasted for more than a decade.

The economic slump began when Corporate America–after many years of making super-profits off operations in Puerto Rico, particularly pharmaceutical production–abandoned the island after favorable tax incentives for investment were phased out starting in the early 2000s. Annual corporate investment in Puerto Rico peaked at 20.7 percent of gross domestic product in 1999–it has fallen to under 7.9 percent as of 2016.

Successive governments–whether led by New Progressive Party, which is aligned with the U.S. Republicans, or the Popular Democratic Party, tied to the Democrats–imposed policies that were guaranteed to make the crisis worse: neoliberal austerity.

Social spending was cut drastically–reductions in the island’s education budget led to hundreds of schools being closed, for example. Public-sector workers have been under intense pressure, with tens of thousands of layoffs and attacks on their unions. Regressive taxes have been hiked, making the sales tax of 11.5 percent higher than any U.S. state.

A succession of state assets were privatized on terms guaranteed to benefit the private purchasers: Back in the 1990s, conservative Gov. Pedro Rosselló González sold off hospitals that were part of a public health care system that was once fairly accessible and affordable at around half their market value.

Austerity measures propelled the vicious circle: Continuing economic decline made shortfalls in government revenues worse, leading to more spending cuts and regressive taxes that caused further economic contraction, and on and on.

The consequences even before Hurricane Maria were dire: Official unemployment is 11.7 percent, well over double the rate in the U.S. as a whole. Just under half of people on the island live in poverty, including three in five children.

– – – – – – – – – – – – – – – –

THROUGH IT all, debt was the straitjacket to make sure Puerto Rico didn’t stray from austerity.

Faced with declining revenues as a result of the contracting economy, various branches and agencies of the Puerto Rican government issued bonds to raise money–but these came not only with the usual obligation to repay the cash with interest, but increasing pressure to intensify neoliberal measures.

The vultures of Wall Street were eager to set up the increasingly complex bond issues. They paid better than most municipal issues, and interest on income from Puerto Rico bonds is exempt from city, state and federal taxes.

But the biggest gamblers on Wall Street see more than a tax loophole in the suffering of the people of Puerto Rico. A 2015 report from the Hedgeclippers.org website paints an ugly picture:

Several groups of hedge funds have bought up large chunks of Puerto Rican debt at discounts and have also pushed the island to borrow at extremely favorable terms for creditors. Hedge fund managers are also recommending the implementation of austerity measures.

Known as “vulture funds,” these investors have followed a similar game plan in other debt crises, in countries such as Greece and Argentina. The spoils they ultimately seek are not just bond payments, but structural reforms and privatization schemes that give them extraordinary wealth and power–at the expense of everyone else.

It’s been obvious for several years that Puerto Rico’s debt burden is unpayable, but the hedge-fund vultures are counting on enforcers in the form of the U.S. government.

A law pushed through Congress last year by Barack Obama and the Democrats established a seven-person Fiscal Control Board with broad powers to direct government agencies on the island and dictate laws and policies. It has ordered, for example, exemptions to federal standards on the minimum wage, Medicaid and Temporary Assistance to Needy Families.

To top it off, the seven members of the board include some of the same financiers who imposed neoliberal policies and arranged the deals that caused the debt burden.

Bondholders may still be forced to take a “haircut”–that is, accept less than what they are owed on Puerto Rico’s bonds. But the mission of the Fiscal Control Board is to make sure working people on the island, not investors, pay as much of the price as possible.

– – – – – – – – – – – – – – – –

ALL THIS “reads like the 21st century equivalent of the metropolitan looting of wealth from the colonies,” as Lance Selfa wrote for SocialistWorker.org after Hurricane Maria struck Puerto Rico head on.

And we know who the looters and their accomplices are.

The hedge-fund parasites who are trying to inflict more suffering on Puerto Rico rather than lose a penny from their investment gambles should face pickets outside their offices. Members of Congress–Republican and Democrat alike–should be greeted at public events by solidarity activists demanding that they remove the noose that is strangling the island.

There is much work to be done to organize for immediate relief in Puerto Rico after the hurricane catastrophe. But the left has an opportunity to also expose and oppose the unnatural disaster that came before Irma and Maria.

We may not hear any more about canceling the debt from Donald Trump, but we can raise our own voices to demand that this crushing burden be lifted off the people of Puerto Rico.

https://socialistworker.org/2017/10/11/abolish-the-debt-that-is-drowning-puerto-rico

Krugman: Trump is about to take a wrecking ball to the last competent government institution left

 

The New York Times columnist wonders if economic catastrophe is on the horizon

JACOB SUGARMAN10.07.201712:29 PM
This article originally appeared on AlterNet.

It’s often lost in the miasma of White House backbiting and scandal, but after less than a year in office, the Trump administration has proven itself historically corrupt and incompetent. Tom Price resigned as secretary of Health and Human Services last week after bilking taxpayers to the tune of $400,000 in charter flights, while the Environmental Protection Agency’s Scott Pruitt has reportedly been wining and dining corporate executives from the very industries he’s meant to be regulating. Then there’s Rick Perry’s disastrous Department of Energy and Ben Carson’s almost complete dismantling of HUD, to offer just a handful of examples.

Thus far, the Federal Reserve has avoided such ignominy. But that may soon be coming to an end, and the effect on the global economy could prove catastrophic.

In his Friday column, Paul Krugman warns of the coming Trumpification of the United States’ central banking system. While Janet Yellen and past Fed chairs like Ben Bernanke have been technocrats divorced from partisan politics, this is merely a political norm. And if the last 10 months have taught us anything, there’s no political norm Trump isn’t willing to shatter. The president has no coherent fiscal policy to speak of, “so trying to guess his Fed choice… is a mug’s game.”

“What he’s more likely to do,” Krugman writes, “is what he’s done with many other appointments—defer to congressional Republican leaders—leaders who, on matters monetary, have been wrong about everything.”

About those failed policies. Two contenders to replace Yellen are John Taylor, a right-wing economist from Stanford who has earned the ringing endorsement of Paul Ryan, and Kevin Warsh, a former Fed governor who vehemently argued against government action as unemployment climbed toward 10 percent in the wake of the 2008 economic crisis. Both appear to subscribe to an Ayn Randian vision of the United States economy, a neo-feudal structure in which vast quantities of wealth are concentrated in the hands of the few.

“I don’t know who Trump will actually pick to head the Federal Reserve,” Krugman admits. “But surely it’s possible, even probable… that one of American policy’s last remaining havens of competence and expertise will soon share in the [country’s] general degradation.”

Read Paul Krugman’s column at the New York Times.

https://www.salon.com/2017/10/07/krugman-trump-is-about-to-take-a-wrecking-ball-to-the-last-competent-government-institution-left_partner/?source=newsletter

The White House is Donald Trump’s new casino

ECONOMY

Trump Is Trying to Run the Government Like His Businesses: This Is Really Bad News for America and the Globe

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Photo Credit: Donkeyhotey / Flickr CC

During the 2016 election campaign, Donald Trump repeatedly emphasized that our country was run terribly and needed a businessman at its helm. Upon winning the White House, he insisted that the problem had been solved, adding, “In theory, I could run my business perfectly and then run the country perfectly. There’s never been a case like this.”

Sure enough, while Hillary Clinton spent her time excoriating her opponent for not releasing his tax returns, Americans ultimately embraced the candidate who had proudly and openly dodged their exposure. And why not? It’s in the American ethos to disdain “the man” — especially the taxman. In an election turned reality TV show, who could resist watching a larger-than-life conman who had taken money from the government?

Now, give him credit. As president, The Donald has done just what he promised the American people he would do: run the country like he ran his businesses. At one point, he even displayed confusion about distinguishing between them when he said of the United States: “We’re a very powerful company — country.”

Of course, as Hillary Clinton rarely bothered to point out, he ran many of them using excess debt, deception, and distraction, while a number of the ones he guided personally (as opposed to just licensing them the use of his name) — including his five Atlantic City casinoshis airline, and a mortgage company — he ran into the ground and then ditched. He escaped relatively unscathed financially, while his investors and countless workers and small businesses to whom he owed money were left holding the bag. We may never fully know what lurks deep within those tax returns of his, but we already know that they were “creative” in nature. As he likes to put it, not paying taxes “makes me smart.”

To complete the analogy Trump made during the election campaign, he’s running the country on the very same instincts he used with those businesses and undoubtedly with just the same sense of self-protectiveness. Take the corporate tax policy he advocates that’s being promoted by his bank-raider turned Treasury secretary, Steve Mnuchin. It’s focused on lowering the tax rate for multinational corporations from 35% to 15%, further aiding the profitability of companies that already routinely squirrel away profits and hide losses in the crevices of tax havens far removed from public disclosure.

We, as citizens, already bear the brunt of 89% of U.S. tax revenues today. If adopted, the new tax structure would simply throw yet more of the government’s bill in our laps. Against this backdrop, the math of middle-class tax relief doesn’t work out — not unless you were to cut $4.3 trillion from the overall budget for just the kinds of items non-billionaires count on like Medicaid, education, housing assistance, and job training.

Or put another way, Trump’s West Wing is now advocating the very policy he railed against in the election campaign when he was still championing the everyday man. By promoting tax reform for mega-corporations and the moguls who run them, he’s neglecting the “forgotten” white working class that sent him to the Oval Office to “drain the swamp.”

Since entering the White House, he’s also begun to isolate our country from the global economy, essentially pushing other nations to engage in more trade with each other, not the United States. Whether physically shoving aside the leader of Montenegro, engaging in tweet-storms with the President of Mexico over his “big, fat, beautiful wall,” or hanging up on the prime minister of Australia, Trump has seemingly forgotten that diplomacy and trade matter to the actual American economy. His version of “America First” has taken aim at immigrants, multinational trade agreements, regulations, and the U.N. Calvin Coolidge acted in a somewhat similar (if far less flamboyant) manner and you remember where that led: to the devastating crash of 1929 and the Great Depression of the 1930s.

What’s In a Shell?

As a new report by Public Citizen makes clear, the glimpses we’ve gotten of inner Trumpworld from the president’s limited financial disclosures indicate that his business dealings, by design, couldn’t be more complex, shadowy, or filled with corporate subterfuge.  He excels, among other things, at using shell companies to hide the Trump Organization’s profits (and losses) in the corporate labyrinth that makes up his empire. And even though the supposedly blind trust run by his sons is designed to shield him from that imperial entity’s decision-making, it still potentially allows him maneuver room to increase his own fortune and glean profits along the way.

So, what’s in such a shell? The answer: another shell, a company that usually has no employees, no offices, and no traceable capital.  Think of such entities as financial gargoyles. They offer no real benefits to the economy, create no jobs, and do nothing to make America great again. However, they have the potential to do a great deal for the bottom lines of Donald Trump and his offspring.  

Think of the corporate shell game he’s been engaged in as his oyster.  After all, anonymous buyers now make up the majority of those gobbling up pieces of his empire. Two years prior to his presidential victory, only 4% of the companies affiliated with people buying his properties were limited-liability, or LLC corporations, which are secretive in nature. Following his victory, that number jumped to 70%.

What that means in plain English is that there’s simply no way of knowing who most of those investing in Trump properties actually are, what countries they come from, how they made their fortunes, or whether there might be any conflicts between their buy-ins to Trumpworld and the national interest of this country.

Trump Lawsuits Meet Pennsylvania Avenue

Secret as so many of his dealings may be, there’s a very public aspect to them that Donald Trump has brought directly into the White House: his pattern of being sued. He’s already been sued 134 times in federal court since he assumed the presidency. (Barack Obama had 26 suits against him and George W. Bush seven at the same moment in their presidencies.)

In other words, one of the nation’s most litigious billionaires is in the process of becoming its most litigious president. A pre-election analysis in USA Today found that Trump and his businesses had been “involved in at least 3,500 legal actions in federal and state courts” over the previous three decades. That volume of lawsuits was unprecedented for a presidential candidate, let alone a president.

It’s fair to say that the public will, in one fashion or another, bear some of the expenses from such lawsuits, as it will, of course, from a lengthening list of ongoing federal investigations, including those into Trump’s business dealings with wealthy Russian businessmen and their various affiliates. According to Public Citizen, Trump formed at least 49 new business entities since announcing his candidacy (including some that were created after he was sworn in as CEO-in-chief). Of those 49, about half were related to projects in foreign countries, including Argentina, India, Saudi Arabia, and Indonesia. Since entering the Oval Office, Trump has met with leaders from each of those countries. And while it’s hardly atypical of a President to meet with foreign leaders, in this case there can be little doubt that national policy overlaps with private interests big time.

As Public Citizen concluded, “Although just prior to being inaugurated as president, Trump announced plans to ‘separate’ himself from his business empire, he still maintains ownership in his corporations and merely reshuffled his businesses into holding companies that are held by a trust that is controlled by Trump himself.” It added that he now has an ongoing stake of some sort in more than 500 businesses. Three-quarters of them are legally registered in Delaware, the largest tax-shelter state in the country.  So expect plenty more trouble and suits and investigations to come.

The Era of Golf-plomacy

Trump has always had a knack for promoting his own properties.  Now, however, he gets to do it on our dime. Indeed, we taxpayers fork over a million dollars or more every time the president simply takes a trip to visit his Mar-a-Lago private club in Florida, his National Golf Club in Bedminster, New Jersey, or any of his other properties. During his first 241 days in office, he spent 79 days visiting his properties.

Meanwhile, a near-army of his well-connected friends and wannabe friends have been sharpening their golf games at Trump locales. At least 50 executives of companies that bagged sweetheart government contracts, as well as 21 lobbyists and trade group officials, are members of Trump golf courses in Florida, New Jersey, and Virginia. As the president’s son Eric Trump told The New York Times,“I think our brand is the hottest it has ever been.”

They’re not just paying for golf, of course; they’re paying for access. About two-thirds of them “happened” to be golfing during one of those 58 days when Trump, too, was present. It doesn’t take an investigative reporter to show that whatever happens on a Trump golf course undoubtedly does not stay there. And keep in mind that the upkeep of the Trump entourage that travels from D.C. to those clubs with him is at least partially funded by us taxpayers, too.

Trump may tilt isolationist when it comes to countries that don’t put money into his clubs and hotel suites, but the nations that do tend to be in big with him. To take one example, Saudi Arabia, the first stop on his first foreign tour, recently disclosed that it had spent $270,000 for lodgings and food at the new Trump International Hotel just down Pennsylvania Avenue from the White House. Trump’s lawyers have pledged to donate any money foreign governments pay that hotel to the Treasury Department. Yet, so far at least, Treasury’s website has no such line item and the money promised for 2017 has now been pushed into 2018. Keep something else in mind: the Trump family forecast that it would lose about $2 million on that hotel in 2017. So far, it has made nearly a cool $2 million profit there instead.

While gaining unprecedented international coverage for his family-owned, for-profit business locales, Trump has created an ethical boundary problem previously unknown in the history of American governments. After all, we, the people, functionally pay taxes to his business empire to host foreign dignitaries, to feed them and provide appropriate security.  In this context, the president has made a point of having official state visits at his properties, which ensures that we taxpayers get hit for expenses when, say, Chinese President Xi Jinping and Japanese Prime Minister Shinzo Abe stay at Mar-a-Lago. Though the president swore he would cover Abe’s stay, there’s no evidence that it was more than a “fake claim.”

Meanwhile, the Trump brand rolls on abroad.  Though his election campaign took up the banner of isolationism, the Trump Organization didn’t.  Not for a second.  On January 11th, days before placing his hand on the Bible to “defend the Constitution,” Trump proudly noted that he “was offered $2 billion to do a deal in Dubai with a very, very, very amazing man, a great, great developer from the Middle East… And I turned it down. I didn’t have to turn it down because, as you know, I have a no-conflict situation because I’m president… But I don’t want to take advantage of something.”

He also promised that he wouldn’t compromise his office by working privately with foreign entities.  His business empire, however, made no such promises.  And despite his claims, Dubai has turned out to be ripe for a deal.  This August, the Trump Organization announced a new venture there (via Twitter of course): Trump Estates Park Residences. It is to be “a collection of luxury villas with exclusive access to” the already thriving Trump International Golf Course in Dubai, a Trump-branded (though not Trump-owned) part of an ongoing partnership with the Dubai-based real-estate firm DAMAC. Its president, Hussain Sajwani, is well known for his close relationship with the Trump family. Units in the swanky abode are expected to start at about $800,000 each.

Meanwhile, DAMAC gave a $32 million contract to the Middle Eastern subsidiary of the China State Construction Engineering Corporation to build part of Trump World Golf Club, also in Dubai. That’s the same China that Trump regularly chides for not working with us properly. The course is scheduled to open in 2018.

So buckle your seatbelts. U.S. foreign policy and the Trump Organization’s business ventures will remain in a unique and complex relationship with each other in the coming years as the president and his children take the people who elected him for a global ride.

His Real Inner Circle

President Trump has made it abundantly clear that sworn loyalty is the route to staying in his favor. Unwavering dedication to the administration, but also to the Trump Organization, and above all to him is the definition of job security in Washington in 2017. Take the latest addition to his communications team, Hope Hicks, who has rocketed into her new career by making devotion to the Trump brand, including defense of daughter Ivanka, a central facet of her professional life.  The 28-year-old Hicks has now been anointed the new White House communications director.

But she doesn’t have as much job security as one other group: The Donald’s personal legal team.  For make no mistake, Trump’s financial dealings lie at the heart of his presidency, raising conflicts of a sort not seen at least since Warren Harding was president in the 1920s, if ever. And yet, even though they should be secure through at least 2020 and possibly beyond, one little slip about Russia in the wrong D.C. restaurant could see any one of them ushered out the door.

In 2011, the Supreme Court’s Citizens United decision rendered corporations people. It erased crucial campaign finance and lobbying restrictions, and elevated billionaires to the top ranks of the American political game. It was a stunning moment — until now. Donald Trump’s presidency is doing something even more remarkable. The billionaire who became our president has already left Citizens United in a ditch.  He’s created not just a political campaign but a White House in which it’s no longer possible to imagine barriers between lobbying efforts, government decisions, and personal interest, or for that matter profits and policy.

In November, after the election, Trump announced that “the law’s totally on my side, the president can’t have a conflict of interest.” Recently, however, the Sunlight Foundation, a non-profit dedicated to government transparency, revealed 530 active Trumpian conflicts of interest and that’s after only eight months in office.

Theoretically, we still live in a republic, but the question is: Who exactly represents whom in Washington? By now, I think we can take a reasonable guess. When the inevitable conflicts arise and Donald Trump must choose between business and country, between himself and the American people, who do you think will get the pink slip? Who will be paying for the intermeshing of the two? Who, like the investors in his bankrupt casinos, will be left holding the bag? At this point, we’re all in the Washington casino and it sure as hell isn’t going to be Donald Trump who takes the financial hit. After all, the house always wins.

Copyright 2017 Nomi Prins

© 2017 TomDispatch. All rights reserved.

Nomi Prins, a TomDispatch regular, is the author of six books, a speaker, and a distinguished senior fellow at the non-partisan public policy institute Demos. Her most recent book is All the Presidents’ Bankers: The Hidden Alliances That Drive American Power (Nation Books). She is a former Wall Street executive.

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US Census report shows increasing social inequality

Small median income gain offset by debt and living costs

By Eric London
15 September 2017

US Census data from 2016 released on Tuesday shows increasing social inequality amid a small gain in household income that is offset by a massive growth of personal debt and rising living costs.

The data tracks the ongoing redistribution of wealth from the working class to the wealthy as a result of the pro-Wall Street policies of both the Republican and Democratic parties. It substantiates the oligarchic character of the United States.

Social inequality

The Gini index, used to measure social inequality, with higher figures indicating a wider economic divide, rose slightly from 2015 (.479) to 2016 (.481). The 2016 figure, according to rankings in the CIA World Factbook, makes the US slightly more equal than Madagascar and less equal than Mexico.

In terms of aggregate income share, the shift from 2015 to 2016 is as follows:

Income share from 2015-2016. *Census data reported to one significant figure, meaning percent decline is not reflected in 2015 and 2016 share columns.

The growth in inequality is even starker when traced from 2007, the year before the Wall Street crisis.

The data reflects income and not wealth, thereby providing an incomplete and conservative indication of the scale of inequality. Even within the highest quintile, the income share increased only for the top 10 percent, and, in particular, the top 5 percent.

Income share from 2007-2016

Household income

The corporate media has portrayed the report as a sign of positive income growth, since it shows a slight rise in median income of 3.2 percent from 2015 to 2016.

But according to the Census data, the earnings of “full-time, year-round workers” remained stagnant. For men in this category, a total of 63.9 million people, earnings declined by 0.4 percent, from $51,859 in 2015 to $51,640 in 2016. For women in this category, 47.2 million people, there was a minor increase, 0.7 percent, from $41,257 in 2015 to $41,554 in 2016. In other words, families with 2 adults working full-time saw a paltry $78 increase in their yearly earnings from 2015 to 2016.

Claims of rising incomes mask the growth of inequality. The Census data shows that the household income of the 90th percentile (the 100th being the highest) was 12.53 times higher than the household income of the 10th percentile in 2016, up from 12.23 times higher in 2015 and 11.18 times higher in 2007. The degree to which income is concentrated in the richest 10 percent of the population is exemplified by the fact that the 5th percentile boasted a household income 3.82 times higher than the 50th percentile in 2016, up from 3.79 times in 2015 and 3.52 in 2007.

As Bloomberg News reported Wednesday, “Since 2007, average inflation-adjusted income has climbed more than 10 percent for households in the highest fifth of the earnings distribution, and it’s fallen 3.2 percent for the bottom quintile. Incomes of the top 5 percent jumped 12.8 percent over the period.”

For the working class, any income increase was transferred to the corporate elite in the form of rising debt payments and increasing living expenses, especially for health care.

According to figures from eHealth, a large private health exchange, average deductibles for families rose 5 percent from 2016 to 2017 (a year after the period covered by the Census report) and average individual premiums rose 22 percent over the same period.

The rising cost of student debt alone largely erases income increases seen by some young people. According to the Census, those aged 15 to 24 saw an income increase of 13.9 percent, from $36,564 in 2015 to $41,655 in 2016, while incomes for young people aged 25 to 34 rose 4.9 percent, from $58,091 to $60,932, nearly double the percentage increase for older age groups.

However, in 2016, student debt rose to an average of $30,000 per young person, up 4 percent from 2015, eliminating over 80 percent of the income rise for 25-34 year olds. For 15 to 24 year olds, the $4,000 increase in median income would hardly cover one sixth of the average debt payment, let alone make up for the fact that young people face a future in which they are unlikely to receive a pension, Social Security or Medicare.

Rising debt levels are not a phenomenon limited to young people. A Bloomberg report from August 10 notes that credit card defaults increased from the beginning of 2015—when roughly 2.5 percent of debt holders defaulted—to the end of 2016, when the total hit 3 percent. This figure subsequently climbed in 2017 to reach 3.49 percent.

Bloomberg notes: “After deleveraging in the aftermath of the last US recession, Americans have once again taken on record debt loads that risk holding back the world’s largest economy… Household debt outstanding–everything from mortgages to credit cards to car loans–reached $12.7 trillion in the first quarter [2017], surpassing the previous peak in 2008 before the effect of the housing market collapse took its toll, Federal Reserve Bank of New York data show.”

“For most Americans,” the report continues, “whose median household income, adjusted for inflation, is lower than it was at its peak in 1999, borrowing has been the answer to maintaining their standard of living. The increase in debt helps explain why the economy’s main source of fuel is providing less of a boost than in the past. Personal spending growth has averaged 2.4 percent since the recession ended in 2009, less than the 3 percent of the previous expansion and 4.3 percent from 1982-90.”

The Bloomberg report explains that income from wages minus household debt trended downward in 2015, meaning that debt is rising faster than wages, causing a loss of roughly $500 billion across the US economy in the space of just one year.

Poverty rate

Though the Census report shows that the poverty rate declined from 13.5 percent of households in 2015 to 12.7 percent in 2016, this figure is substantially higher than the 11.3 percent level that prevailed in 2000. In reality, individuals and families must make 2.5 to 3 times the official poverty rate of $12,000 for an individual, $15,500 for a married couple and $25,000 for a family of four just to make ends meet.

What the data really shows is that the poorest half of the country–over 150 million people–is in a desperate financial position, with the next poorest 40 percent facing constant financial strain and a declining share of the national income. In regard to poverty, the Census Bureau maintains figures that go up only to 200 percent of the official poverty level. The latest report shows that 95 million people—29.8 percent of the population—fall into this category. The share of those under the age of 18 in this category is much higher–39.1 percent.

This is the context for the drive by the Trump administration and both big business parties to slash corporate taxes, impose a health care “reform” that will increase costs for millions of people, and accelerate the transfer of wealth from the working class to the financial aristocracy.

WSWS

 

 

 

Enough With the Top 1 Percent: The Top 20 Percent, the Upper Middle Class, Is Hoarding the American Dream

ECONOMY

Scholar Richard Reeves points out the real winners in the economy as Congress eyes tax reform.

Photo Credit: University of Nevada Las Vegas / Youtube.com

Already President Trump and the Democrats are trading clichés in the opening skirmishes over Trump’s tax reform proposals. Yet both are missing the bigger reality of who are the economy’s winners and losers—a pattern that’s only grown over recent decades.

Trump, of course, want to cut corporate taxes, and consolidate and lower rates for income tax brackets, among other things. All one really needs to know there is that he is dubiously assuming the savings for businesses wil “trickle down” to employees in jobs and wages. Leading Democrats, in response, are being misleading in a different way.

“If the president wants to use populism to sell his tax plan, he ought to consider actually putting his money where his mouth is and putting forward a plan that puts the middle class, not the top 1 percent, first,” Senate Minority Leader Chuck Schumer said.

Trump’s plan mostly would benefit the biggest corporations and the wealthiest individuals. But Schumer’s Occupy-Wall-Street-like whack at the top 1 percent and defense of the so-called middle class is muddled in a different way. That’s because it isn’t the super rich, but the upper middle class—representing the top 20 percent, or households making at least $117,000 a year—that disproportionately have been doing better than the rest of Americans, the bottom 80 percent. Their tax breaks are one reason why.

“The upper middle class, the top fifth, broadly, and above, not only maintain their position very nicely, but perpetuate it over generations more effectively than in the United Kingdom,” said Richard Reeves, a Brookings Institution scholar and author of Dream Hoarders: How The American Upper Middle Class is Leaving Everyone in the Dust, Why That is a Problem, and What to Do About It. “And yet, that that’s not so widely known or seen as a problem, because of the kind of myth of classlessness that has developed in the U.S.”

Comments like Schumer’s—defending a blurrily defined middle class—are a perfect example of the myth of classlessness that is parsed by Reeves, who was born in Britain but became a U.S. citizen. The biggest picture statistic he cites to frame the problem of improperly dissecting the economy’s real winners and losers is pre-tax income growth between 1979 and 2013. The bottom 80 percent saw their incomes grow by $3 trillion, while the top 20 percent saw their incomes grow by $4 trillion. When you put this on a graph, the bottom four quintiles, or 20 percent sections, slope upward slightly. But not so with the upper middle class; people making roughly $120,000 a year or more.

Why does this matter? It doesn’t just confirm what most Americans feel—that they are relatively stuck economically, perhaps doing better than their parents, but sometimes not even that. It shows that bashing the super-rich, the 1 percent, is politically expedient rhetoric that diverts the focus from those in America, members of both major parties, whose interests are maintained by the political system, instead of sharing the wealth. Reeves’ book, Dream Hoarders, explains how the top 20 percent protects its status, essentially by segregating educational opportunity, their housing—which is federally subsidized through the tax deduction for home mortgage interest rates—career networking and other government-supported perks. As he recounts in a lecture that traces how he wrote his book, he started by noticing the politics surrounding a 2015 proposal by President Obama to change the way the feds managed tax-free college savings plans, called the 529 program.

“Don’t you dare touch my 529!” was the response upper-middle-class constituents told top Democrats, Reeves said, then laying out how these folks think: “Do you know how hard it is to make ends meet by the time I’ve saved for my kids’ college, paid their private school fees, paid my massive mortgage—thanks for the [mortgage deduction] tax break; still it’s lots of money—I’ve got a skiing holiday, school trip gets more expensive, I’m barely making even here…I’m working really hard. I’m part of the 99 percent.”

“No, you’re not,” Reeves said, underscoring how the upper middle class is different. The 529 tax break was a college savings plan where you don’t pay any capital gains on money set aside and invested here, he explained. Who has these college savings plans? he asked. Forty-seven percent of people earning $150,000 or more annually, he answered.

“The truth was it [Obama’s proposal) was unbelievably unpopular among the constituency that really mattered… something that was virtually sacred for the upper middle class in America. It was about education. This was rewarding savings. It was about the future,” Reeves said. “For me, it was like, boom! No wonder we can’t change the tax system, when even relatively liberal people try to do it… People also forget this [529] was a tax break that has long been proposed by Republicans… Don’t mess with the American upper middle-class—that was the lesson.”

Reeves listed a series of metrics that he says amount to hoarding the American dream. It’s the inverse of the way social scientists talk about intergenerational poverty, or cite statistics about how most people don’t stray far from the rungs on the economic ladder of the family they were born into.

Thirty-seven percent of those born into the top 20 percent also stay there, he said, a slightly bigger number than the poorest 20 percent of Americans. “Wealth is even stickier than income. Forty-four percent of the wealth of the upper 20 percent remains there.”

Why is this happening? It comes down to hoarding the best opportunities in education, housing, careers and government tax policies that reinforce that status. This is not about inheritance taxes, which is a rarified subject. It’s how 40 percent of the upper middle class live near the public schools that have the best test scores. It’s how zoning in those communities only allows housing at price points well above those affordable by people earning median incomes—the real middle class. It’s about how the mortgage deduction allows people to buy even pricier homes. It’s about going to top schools, colleges and universities, and sending your kids there, and creating networks that turn into select entry-level jobs, internships and careers. In short, Reeves says all the political verbiage about equal opportunity, meritocracy and fighting inequality is sullied.

“Forty-six percent of those in the top 20 percent have the same educational status as their parents. The inheritance of educational status is even greater than wealth, which is even greater than income,” he said. “The expansion of higher education in the U.S. has disproportionately gone to the top. Four out of five of those in the top 20 percent go to elite schools. Two-thirds of the students in the top schools are from the top 20 percent.”

On the subject of tax breaks—which will be coming to the national political landscape as Trump and the GOP push tax reform—the upper 20 percent gets the most capital gains benefits, mortgage interest deductions and Social Security and pension earnings, Reeves said.

“The point is clear. This is upside-down. These are upper-middle-class tax breaks,” he said. “And, like the 529, guided with laser precision to the bank balances of people like me: to the bank balances of people who have been doing so well in recent years. And by god, it’s hard to touch them. Even the incoming Treasury Secretary [Steve Mnuchin], he mentioned we might reduce tax rates but do so by getting rid of a lot of these deductions. Wow, that didn’t last very long. By the time the National Association of Housing and the Republicans [weighed in]… This stuff is hard to get at. I think part of the reason is we [the upper middle class] have kidded ourselves that we are part of the 99 percent.”

Reeves said that nine out of 10 Americans tell pollsters they are middle-class. That isn’t accurate or useful on many levels, he said, especially when it comes to addressing the lingering frustrations about one’s place and prospects in the American economy.

“I have genuinely come to believe that unless the conscience of the American upper middle class is somewhat awakened, then it will be very hard to bring about the political reforms that I believe are necessary… to one of equal opportunity,” he said. “Right now, America, some of America, has something of a problem of a sense of entitlement. And I mean the upper middle class. And they are very good about sometimes talking about people who feel entitled to welfare; I think they feel pretty entitled to their upper-middle-class welfare too. I think Obama found that out too.”

Indeed, Reeves said it is not very useful for Democrats to keep pushing out the rhetoric blasting the 1 percent, because among other things, that’s not what’s really going on, and it doesn’t address structural inequality.

“I think that until and unless we recognize that we are not the 99 percent, that we have done pretty well, and that we will have to give something up—not much, but a bit, a bit on zoning, a bit on school admissions, a bit on taxes, in order to help the others—then we won’t get anywhere,” he said. “But that will require us to recognize that we are not the losers from inequality trends, but the winners.”

Steven Rosenfeld covers national political issues for AlterNet, including America’s democracy and voting rights. He is the author of several books on elections and the co-author of Who Controls Our Schools: How Billionaire-Sponsored Privatization Is Destroying Democracy and the Charter School Industry (AlterNet eBook, 2016).

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Amid warnings of a new financial crash, Fed Chairwoman promotes illusions at Jackson Hole conference

By Nick Beams
26 August 2017

Yesterday’s speech by Federal Reserve chairwoman Janet Yellen to the conclave of central bankers at Jackson Hole, Wyoming recalled events at the gathering 12 years ago. At that meeting, the growing signs of the devastating financial crisis that was to strike in 2008 were completely ignored. That was likewise the situation at this year’s meeting, held under conditions where the surge in stock markets is bringing warnings of a major collapse.

The 2005 meeting was organised as a celebration of the achievements of the “Maestro,” Fed chief Alan Greenspan, whose policies, it was claimed, had brought a new era of prosperity to the global economy. Only one discordant note was sounded in remarks by the then-International Monetary Fund economist Raghuram Rajan, who warned that easy money might be creating the conditions for a financial crisis. But he was firmly put in his place.

This year’s address by Yellen is widely expected to be her last as Fed chairwoman, as her current term expires in February next year and President Trump, who decides on the position, has denounced her in the past.

The circumstances of this year’s conclave are, of course, very different from those of 12 years ago, coming as they do after the eruption of the most serious financial crisis since the Great Depression of the 1930s. Nonetheless, there are similarities between the two.

Yellen’s speech could be described as a celebration of the achievements of the Fed and other regulatory authorities in putting in place measures to prevent any recurrence of the events of 2008, while totally ignoring the growing signs of the buildup of conditions for another financial disaster.

Yellen began her remarks with a reference to the crisis of a decade ago and then went to a defence of the limited regulations introduced since then, which are now threatened by the plans of the Trump administration to introduce sweeping deregulation.

The measures introduced over the past decade both in the US and around the world had improved financial regulation “to limit both the probability and the adverse consequences of future financial crises,” she claimed.

These reforms had strengthened the financial system. Credit was broadly available on good terms and lending had advanced in line with economic activity, “contributing to today’s strong economy.”

She did not even think it worthy of a reference, let alone an explanation, for why, in view of this “strong economy,” hundreds of millions of ordinary working people in the US and around the world are seething with discontent and anger over an economic system that is continually reducing their living standards and social conditions, while the financial speculators, responsible for the crisis, accumulate vast wealth.

According to Yellen, the resilience of the financial system had been boosted, banks were safer, the problem of “too big to fail” had been reduced, and a system had been put in place “to effectively monitor and address risks that arise outside the regulatory perimeter.”

“Our resilient financial system is better prepared to absorb, rather than amplify, adverse shocks, as has been illustrated during periods of market turbulence in recent years,” she declared.

Of course, Yellen could not maintain, as was the case 12 years ago, that the threat of financial crisis had been overcome. The memories are still much too fresh amid the ongoing impact of the disaster, and, as she herself acknowledged, even at the Jackson Hole gathering of 2007 the discussion was “fairly optimistic about the possible economic fallout from stresses in the financial system.”

So, while “we can never be sure that new crises will not occur,” if the lessons of the past are kept in mind, “we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly, sparing households and businesses some of the pain they endured during the crisis that struck a decade ago.”

Yellen’s speech was the promotion of illusion over reality. It was entitled “Financial Stability a Decade after the Onset of the Crisis,” but the Fed chairwoman passed over without comment one of the most significant financial developments in economic history—the massive accumulation of financial assets by the Fed and other central banks around the world.

One of the reasons Yellen did not even touch on this issue could well be that markets are now so fragile that any indication of how the Fed plans to reduce its asset holdings could itself touch off a financial panic by reducing the cash flows on which speculation has fed.

The Fed’s balance sheet has expanded to $4.5 trillion from around $800 billion before the crisis, while the combined balance sheets of the top four central banks–the Fed, the ECB, the Bank of Japan and the Bank of England–now exceeds $13 trillion. These assets comprise 36 percent of the combined gross domestic product of these countries, triple the share in 2007.

Last year, according to a report by Bloomberg, the world’s 10 largest central banks increased their asset holdings to $21.4 trillion, a 10 percent increase over the previous year.

This further increase in central bank holdings has coincided with the global rise in equity markets, fuelling growing concerns that the formation of a new financial bubble is well advanced.

The warnings come from a number of quarters. In a report prepared for its most recent meeting, Fed staff stated that “vulnerabilities associated with asset valuation pressures had edged up from notable to elevated.”

A report published this week in the Financial Times noted: “The cyclically adjusted price-to-earnings ratio of the US stock market has been higher only during the peak of the dotcom boom, and with bond yields still near record lows, there is mounting evidence of investors turning to convoluted, potentially risky bets in search of precious returns.”

Among those risky bets is a return to investment in credit default swaps, which played a critical role in the financial crisis of 2008, along with new forms of speculation such as purchases of the cryptocurrency bitcoin.

This week, Bloomberg published a report that three major banks–HSBC, Citigroup and Morgan Stanley–see mounting evidence of a major downturn in the business cycle.

“Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds, and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop,” the report stated.

Andrew Sheets, a market strategist at Morgan Stanley, linked conditions to those that prevailed between 2005 and 2007.

But even as they warn of what is to come, the major banks and finance houses continue on the path to disaster, recalling the infamous remarks of Citigroup chief Chuck Prince in July 2007 that “as long the music is playing, you’ve got to get up and dance.”

The 2008 financial crisis caught the American and international working class by surprise and it was unprepared for the social devastation that followed. Now, the lessons of the past decade must be drawn and acted upon. Not only do the ruling political and financial elites have no answer to the contradictions of the profit system over which they preside, their very actions have prepared the conditions for an even bigger disaster.

No one can predict when a new financial crash will strike, but the conditions for it are well advanced. It will bring an eruption of social struggles and intensified class conflicts in which the decisive question is the fight for a socialist program and the construction of a revolutionary leadership.

WSWS