It’s not that I mind that the rich are rich. Nor do I mind that people get rich. Hell that is supposed to be what America is all about, right? After all, if you invented the first portable cell phone like Dr. Martin Cooper did in 1973, you earned it. Without you, teenage girls would be twitting their thumbs rather than tweeting their friends. Without you there would be no wireless communication industry. The story of Martin Cooper is the stuff that conservative Republicans like to say, “That’s what makes America the greatest nation on earth.” Even without being a conservative Republican, we can agree with that slogan.
What gets my hackles up is the people who are able to enhance their riches simply because they have lots of money to start with. Yeah, I know what you Bentley owners are saying. Here we go chastising the 1%’ers once again. Yep, no doubt it’s true. It may hardly seem fair, but lets face it, everybody else has already been beaten up so badly, there is nobody left. Our apologies to Round Hill Road in Greenwich.
Do What You Will Do- But Only Those Who Deserve It
Here is a simple rule. If a 1%’er rips off another 1%’er, bravo! That is just the cost of being rich. If a 99%’er rips off another 99%’er, not so cool. But, when a 1%’er rips off lots of 99%’ers, that just harkens back to the days of slavery. Not slavery based on race but on liquidity and economic power. And, there is a fair amount of evidence that the biggest perps are getting away with it.
Yes, we are talking about big banks and such. When these guys charge you $34 for a bounced check, you know exactly when and how you are being ripped off. What has been going on for the last few years is harder to identify but no less a rip off of the American public.
At the height of the financial crisis in 2008, Goldman Sachs, one of the top Wall Street Investment Banks, was on the verge of technical insolvency. Without outside help, they might have failed. The consequences were dire. Along came legendary investor Warren Buffet with a cool billion-dollar loan to save the day. The rate of interest at 10% was especially high and would never have been accepted if Goldman were not in such a pickle. Hooray for Buffet. He put it to one of his own kind.
American Greed, the CNBC evening time documentary is a great source instruction on just how to cheat, lie and steal. A recent episode told the story of a New Jersey woman who presented herself as a real estate investment advisor. She managed to charm her way into the hearts of about $10 million worth of her many middle-class friends. It was 2008, the worst of the real estate foreclosures. Her pitch was essentially to use investor money to help prevent foreclosures. Investors were promised outsized returns from this illogical but noble mission. In the end, the noble mission proved less than noble. The heroine did nothing more than create a Ponzi scheme. Not a single dollar was ever invested. She spent it all on a lavish lifestyle. For this she was caught, convicted and hauled off to the slammer, justice done for crime committed.
What we are talking about is far more subtle and much more likely to go completely unnoticed by most of us in our daily lives. Take for example JPMorgan Chase and Goldman Sachs. Extensive articles by David Kocieniewski and Jessica Silver-Greenberg of The New York Times spell in detail how items essential in our everyday lives are being made more costly. We are talking about hundreds of millions of dollars each year that fattens the profit picture of these Wall Street institutions and thus the 1 per cent of the population that own or control 80 per cent of these companies.
Bankers: Get Out Of Jail Free Cards
According to the article, JP Morgan is negotiating a settlement with the Federal Energy Regulatory Commission for nearly a half a billion dollars. FERC accuses JPMorgan of illegal trading in the California and Michigan electricity markets. Rather than boring our kind readers with the legal details, we offer this simple notion. Is it likely that an agency for your federal government would attempt to extract $500 million from a company because of electricity prices that were too low?
The person regarded as the architect of the scheme is the head of the trading unit Blythe Masters. Regulators allege she perjured herself in testimony to the Commission. At this time she continues in her position with the full support of JPMorgan. She is likely to escape without even a slap on the wrist. The rumored $410 million settlement represents only 2% of the company’s annual earnings. With money of this magnitude is it any wonder that the price of residential real estate in New York City is as high as $5,000 per square foot?
And speaking of real estate and the continued roll-up of riches, here is something to ponder. During the height of the foreclosure actions in 2008, prices were not measured in terms of their affordability by local wage earners. During 2008, the average income in the city of Los Angeles could afford less than 20% of the houses available for sale at that time. If you applied economic logic to this riddle, you might have concluded that prices were headed south, maybe much further south before a bottom was reached. Not true; 2008 marked a bottom because of the role played by institutional hedge funds. The National Association of Realtors started tracking institutional hedge fund buying activity in 2008, when they totaled almost 35% of all buying of so-called “distressed housing”. These vultures helped boost prices about 20% over where natural forces might have dictated. If you were a first-time homebuyer during this period, you paid more simply because you were in competition with another 1 per center.
But all this appears to be changing as housing prices as well as mortgage rates rise. In June only 15% of distressed sales came from institutional buyers. Now that the hedge funds have pushed out the everyday buyer and driven up prices to inflated levels, they are quietly withdrawing to leave the public to hold the bag. Once again we find a case that benefits and distorts a market for those with cash. Yes, it is American, but not necessarily the best for America.
Wealth Taxes And The New Metrics
These illustrations point to the real issue: accumulated wealth. The combination of wealth created over the past 20 years from the Internet and supportive technology has been explosive. It is nearly as great as the wealth created by the number of sports athletes earning in excess of $20 million a year! Tyler Cowen of The New York Times once again hits the point perfectly. The next great battle in Congress will come over wealth taxes not income taxes. In a recent article, Tyler sites a new paper, “Capital Is Back: Wealth Income Ratios in Rich Countries 1700-2010” by Professors Thomas Piketty and Gabriel Zucman of the Paris School of Economics.
The argument here is that for several years it has been popular to measure a nation’s debts against their ability to produce and earn goods and services: the debt to GDP ratio. European countries and more recently the United States reached 100% and that is considered rather dangerous levels. What would happen, for example, if the next iPhone were a total dunce that nobody purchased? Would the US find itself in the same awful place as Detroit?
The Profs say no. In fact they maintain that the more accurate measure is the ratio of debt to wealth. In other words, tax the piggy bank. Here is why Tyler Cowen sees rich people with fat piggy banks as the next battleground. Wealth accumulation in the United States and seven other industrialized countries has risen relative to GDP. Wealth to income ratios climbed from 200%-300% of GDP in 1970 to 400%-600% in 2010. (Think ,Stock Market, think AOL, Yahoo, Apple, Microsoft, Google, Dell etc.)
When looking at debt to wealth ratios, instead of looking at 100%, we are talking about a much more palatable 10%. One can easily see the potential here for battle. Democrats will have a boatload of ammunition to change the estate tax regulations back to 20th century levels. The Republicans on the other hand will be able to point out that two French professors did the study. These guys are Un-American.