Most of Us Will Not Have a Better Life Unless We Turn the Tables on the Super Rich
Continued from previous page
To get those returns, however, we have to make speculative, high-risk investments. These include investments in hedge funds, derivatives, and credit default swaps—some of the financial innovations that some very smart young fellows on Wall Street have designed. These are not investments in the “real economy,” in which firms make actual things or provide services that people use. Rather, these are ways to place financial bets on the movement of money and markets. The question for you is, how much are you willing to risk?
Think about your $200 million. If all you had was $20 million, you would be able to live a very wonderful life, meet all your material needs, and guard against most possible problems. You might not be able to buy genuine love or eternal life, though you’ll probably live longer. You’ll be able to go to the Mayo Clinic for whatever medical need you have and enjoy every luxury the planet has to offer. With another $20 million, you will be able to provide the same to your progeny.
So, setting aside that $40 million, you have $160 million you’re willing to gamble with. Wouldn’t it be fun to keep score and watch it multiply? It is, after all, mostly just numbers on a page or screen. So we allocate a large portion—let’s say $80 million—to the new financial instruments.
Now imagine this same conversation playing out in the wood-paneled offices of the 1 percent all across the planet between 1998 and 2007. As a result, huge amounts of wealth shifted into the speculative market.
The speculative funds of the top 1 percent are merged with additional trillions of dollars in sovereign wealth funds—the colossal piles of wealth generated by Middle Eastern oil profits and Chinese exports and held by central governments. Add to this the trillions in cash accumulated by the world’s corporate 1 percent—banks, insurance companies such as AIG, and the finance arms of corporations such as General Electric. That totals trillions of dollars of wealth looking for a home—not in sleepy investments in the real economy, which are incapable of generating such large returns, but in the casino-like speculative economy.
Wall Street drove this process by seeking more and more high-risk deals. One of their favorites was high-interest mortgage debt, known as subprime mortgages. Investment banks and brokers such as Morgan Stanley, Citigroup, and Bank of America called up mortgage lenders and people who bundled mortgages together and said, “Bring us more of those high-return, high-risk deals!” So trillions of dollars flowed into the shadow financial sector—and the deals became more and more delinked from the fundamentals of the real economy.
By 2007, the speculative bubbles had grown, not just in the housing market but also in other sectors of the economy. Commodity futures rose, pushing up the cost of foodstuffs and triggering food riots across the world. Speculation in oil futures drove up the cost of oil, and a gallon of gas during the summer of 2008 topped $4 a gallon. Americans spent hundreds of billions of dollars more on gas in 2008 than they did the previous year. 4 Funds that could have financed a transition to a green economy went to the oil industry, which enjoyed unprecedented profits—in 2008, ExxonMobil set records with profits of $45.2 billion.
Tick, tick, tick. Kaboom!
The extreme inequalities of wealth—stagnant wages and speculative activity—brought the economy to its knees. And here’s the bad news: it hasn’t stopped. As long as the 1 percent has excess money to bet with, they will continue seeking speculative investments.