Wall Street's Meltdown: How America Caught Speculative Fever
"What we are witnessing," a front-page Washington Post analysis announced last week, "may be the greatest destruction of financial wealth that the world has ever seen."
The ongoing Wall Street meltdown is drawing all sorts of breathless historical comparisons. But few analysts seem to have noted an equally compelling historical coincidence: This "greatest destruction" of wealth we are now witnessing follows three decades of wealth's greatest concentration, years that have seen America's wealthy double their share of our nation's treasure.
Could these two phenomena somehow be related? And if they are, can a Wall Street bailout that ignores America's top-heavy distribution of income and wealth ever effectively restore real economic security back to average Americans?
This week, throughout the corridors of Congress, progressive activists will be working to expand the debate on the bailout that Wall Street's colossal collapse has made an urgent necessity. They'll be pressing lawmakers to target the top. They figure to find a much more receptive audience than they might have expected only weeks ago.
The staggering suddenness and size of Wall Street's meltdown has left many observers convinced that ever-escalating rewards for America's movers and shakers have become a significant contributor to everything that ails us economically.
Even conservative-leaning economists are bewailing the consequences of overgenerous compensation at the business summit. Huge "short-term rewards" for Wall Street's finest, as economist Robert Samuelson wrote last week, "blinded them to the long-term dangers" inherent in the hazardous risks they were taking -- with other people's money.
But decades of concentrating wealth have had consequences that go even deeper into the roots of the current Wall Street crisis. This concentrating served to inflate America's now-popped housing bubble. In metro areas throughout the United States, housing costs rose fastest in those areas where income and wealth had concentrated most intensely.
Asset bubbles like the housing speculative surge come naturally to extremely unequal societies. Inequality has always unleashed dynamics that make speculation inevitable. Where wealth tilts to the top, average people have less to spend. The wealthy, in turn, have less reason to plow their wealth into productive investment in the "real" economy, simply because average people can't afford to buy whatever that investment might produce.
But big wealth-holders have to do something with their dollars. They can, after all, only personally consume so much. So what happens with the dollars the wealthy cannot consume and cannot invest productively? The wealthy plow these dollars into speculation.
The concentration of wealth at the top, of course, doesn't just leave the wealthy with more wealth. They have more power, too, more clout in the political sphere. Over recent decades, America's wealthy have translated that power into electoral and lobbying blitzes that have swept away consumer- and homeowner-friendly government regulations.
U.S. mortgage lenders, freed from regulatory oversight, were able to misleadingly market high-interest subprime loans to millions of American families. Those families, for their part, had little choice but to sign on the dotted line. In a deeply unequal United States, with workers taking home a record low share of the nation's income, far fewer families could report enough income to qualify for a traditional mortgage.
In short, inequality cooked up the current Wall Street meltdown. Any serious attempt to end this meltdown -- and prevent another -- has to recognize inequality's role.
Progressive analysts and activists have begun peppering Capitol Hill with this message. They're advancing a wide range of proposals designed to make any bailout legislative package a springboard for a more equal United States.
For starters, notes Essential Action director Robert Weissman, Americans need to beware generic calls for "reform" and insist on specifics that would, for instance, "impose restraints on executive and top-level compensation."
What form might those restraints take? Progressive economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., is calling for "an absolute limit of $2 million in total compensation for any executive at any firm" that wants in on tax dollars.
"Restraining compensation on Wall Street will be incredibly important in reversing the pattern of inequality that has developed over the last three decades," says Baker, who notes that "exorbitant compensation packages on Wall Street" have "distorted pay structures throughout the economy." The Institute for Policy Studies, an activist think tank also based in Washington, wants to require companies seeking bailout assistance to pay their top execs no more than 25 times what their lowest-paid workers are receiving.
"Government action should prioritize protecting ordinary people and the real productive economy," notes Chuck Collins, the director of the Institute's Program on Inequality and the Common Good, "not further reward the super rich and the speculative sectors of the economy." Toward that end, Collins adds, lawmakers ought to be placing an income tax surcharge on America's highest incomes.
"The 50,000 households with annual incomes over $5 million," he points out, "are the biggest winners from 25 years of Wall Street deregulation." Who will be the economy's biggest winners over the next 25 years? The bailout decisions that Congress begins to make this week will go a long way toward shaping that answer.