California Free Press

Off the Top of My Head

Kamala Should Get Out in Front of Trump on Taxes

by John Lawrence

You know that Trump wants to make the Trump tax cuts permanent. These are the tax cuts that added $7 trillion to the national debt and primarily benefited the rich. Kamala should finesse this issue by taking it away from Trump. Here's how: make it part of her platform to keep the Trump tax cuts for the poor and middle class while sunsetting them for the rich. Even better use the money saved by sunsetting the tax cuts for the rich to give the poor and middle class an even bigger tax cut than the Trump tax cuts provided. The important thing is to get out in front of Trump on this issue. Let him respond to her. Trump will then be behind the eight ball on this and other issues. All Trump has to offer is personal attacks, and they seem to be falling flat with respect to Kamala. Her politics of joy seem to be winning, and the Democratic National Convention should add another boost to the Harris-Walz ticket.

CNBC has just reported: "[Harris'] policies include a ban on “corporate price-gouging” to lower the cost of groceries and prescription drugs, and they aim to expand affordable housing and cut taxes for the middle class." Of course nothing will happen unless Democrats also control both Houses of Congress. But that should not prevent Kamala or any other Presidential candidate from promising big things. The important words are "tax cuts for the middle class." Some of the other plans Kamala is espousing are "the first-ever federal ban on “corporate price-gouging” on food and groceries". Well, good luck with that. Good talking point though. Her other plans include encouraging builders to build starter homes and Federal help with down payments on a house. CNBC reported: "As the supply of entry-level homes expanded, the Harris plan would “provide working families who have paid their rent on time for two years and are buying their first home up to $25,000 in down-payment assistance, with more generous support for first-generation homeowners,” according to the fact sheet." $25,000 will not be much help for a down payment though. At 20% down, $25,000 would only provide a down payment on a $125,000 house. This might be possible in some parts of the country as real estate values vary a lot with region. However, in San Diego starter homes are around $1 million. It would be a non-starter.

Harris will also call for the U.S. to construct 3 million new housing units over the next four years. I don't think this would be very effective as long as those new houses are subject to the market. Market rate housing is the problem, not the solution. Preventing hedge funds from buying up houses and then renting them out would help the situation. Some mechanism must be found such that the average middle class family can afford to buy a house. The emphasis on affordable starter homes is a big deal. Democrats are also all about lowering the price of pharmaceuticals. We can thank Joe Biden for that. However, he won't get credit since that deal doesn't become effective for another year. The various other parts of Kamala's economic plan won't resonate all that well with the American public because they won't understand them. However, "tax cuts for the middle class" will resonate and will steal Trump's thunder. Let Trump complain, as he did with not taxing tips, that it was his idea first!

Off the Top of My Head

Hedge Funds Outbidding Average Americans for Single Family Homes

by John Lawrence

Want to know why single family homes are less affordable? Hedge funds are buying them up and turning them into rentals. The long term implications of this are that the American people will become a nation of renters. Home ownership has been the traditional way that Americans have increased wealth. A home represents an asset which increases in value over the years. Renters typically end up with no assets and very little to provide for themselves in old age. Those with fixed incomes are even priced out of the rental market as rents continue to increase. That's why so many seniors are ending up on the streets. This issue is even becoming noticed by Democratic politicians. In the Senate, the End Hedge Fund Control of American Homes Act of 2023 would force big investors to sell off all the single-family homes they own over a period of 10 years, and eventually ban hedge funds from owning any single-family homes entirely. "The housing in our neighborhoods should be homes for people, not profit centers for Wall Street," co-author of the bill, Senator Jeff Merkley, D-Ore., said in a press release. "Yet, in every corner of the country, giant financial corporations are buying up housing and driving up both rents and home prices. It's time for Congress to put in place commonsense guardrails that ensure all families have a fair chance to buy or rent a decent home in their community at a price they can afford."

If home ownership is taken off the table for most Americans, there is only one asset class remaining in order to build wealth - the stock market. Today about 58% of Americans are invested in the stock market in some form or other. That's a huge increase from 1990 when only about 20%of Americans owned stock. If the stock market continues to go up in value, those Americans so invested will have a nest egg in their advanced years. However, there is no guarantee that this will be the case. Money has been made in the stock market, and money has been lost. Home ownership by and large has always been a much safer bet. The dotcom bubble of 2000 was a rapid rise in U.S. technology stock equity valuations fueled by investments in Internet-based companies in the late 1990s. When the bubble burst, the Nasdaq, which rose five-fold between 1995 and 2000, saw an almost 77% drop, resulting in a loss of billions of dollars. Home ownership, however, maintained its value. It took 15 years for the stock market to regain its value.

This does not augur well for Americans who are placing all their bets on the stock market to provide for them in old age. Stock market based wealth can vary considerably over time based on economic conditions over which the average investor has no control. Sophisticated investors can buy and sell on an almost instantaneous basis. The average American, however, doesn't have the expertise to exit the market if a crash or even a downturn is imminent. The stock market does not represent a stable investment in the same way that real estate does. Even though real estate values collapsed during the 2007-2008 Great Recession, rents remained stable in that time period. Notably rents did not decrease. Between 2007 and 2011, the worst years of the 2008 Recession, rental prices increased. So an investor in rental property continued to receive the same or more rent, even if the underlying property value decreased temporarily. People should not look to the stock market for all their wealth building needs because it can collapse leaving one with nothing. A rental investment, however, will probably continue to produce rental income in perpetuity unlike a pension or social security which will terminate on the death of the recipient. "This [affordability] crisis [for home ownership] has been exacerbated in recent years by an increasing number of large investors purchasing a significant percentage of single-family homes, squeezing out prospective buyers," said Rep. Adam Smith, D-Wash., in a statement.

How private equity is destroying the labors of love

Private equity is turning every business into a short-term profit center.

by Robert Reich

Aug 17, 2023

 

 

 

 

Friends,

Last week, Paramount announced that it will be selling Simon & Schuster, one of the biggest and most prestigious publishing houses in the United States, to the private-equity firm KKR, for $1.62 billion.

The acquisition vastly increases the influence of financial interests over book publishing.

This worries me because it continues a trend that began years ago — elevating profits above the love of publishing books.

When I published my first book decades ago, the purpose of most publishing houses was to publish books. Publishers made money in order to publish books. They earned enough on their big bestsellers to take chances on unknown authors like me and put out books that delighted small numbers of enthusiastic readers but never showed a profit.

But in more recent years, the major purpose of most book publishers has switched from publishing books to making money.

After KKR takes over Simon & Schuster, this prestigious publishing house won’t be taking risks on unknown authors or putting out wonderful books that appeal to small numbers of enthusiastic readers. It’s going to be a profit center for one of the biggest private equity firms on Wall Street, dedicated exclusively to making money.

The same dynamic has infected other parts of the economy. News organizations once made money in order to report the news. Now, news organizations exist in order to make money.

For years, CBS News was insulated from the commercial side of CBS. This allowed Edward R. Murrow and Walter Cronkite to report what they thought the public needed to know. Today, most network and cable news has to show a profit. It’s been a slippery slope leading to Fox News’s shameless pandering to the lies and bigotry its viewers find entertaining.

Hospitals and health insurers once made money in order to provide health care. Now, hospitals and health insurers provide health care in order to make money.

Blue Cross and Blue Shield began as nonprofits that insured all comers. But as big profit-seeking insurers targeted younger and healthier people, the Blues were left to insure the older and less healthy, which made it impossible for them to continue. They turned to making money. Now, private equity runs hospitals, into the ground.

And so on.

I was reminded of this distinction — between making money in order to provide particular products and services, and providing products or services in order to make money — while watching the magnificent series “The Bear,” now streaming on Hulu.

If you haven’t seen it, I won’t give away the plot except to say that the major characters want to create a great restaurant. Each has a backstory that reveals why this is so important to them.

Making money is the means to achieving their dreams, but they aren’t in it for the money. They’re in it to produce wonderful food, served with perfection. This transcendent goal is central to their own self-worth. It gives each of their lives purpose and meaning.

It’s still possible for businesses to exist in order to produce wonderful goods and services. I know many retailers, small manufacturers, and professionals who do what they do mainly for the love of it. (My father ran a clothing store, and although he worked seven days a week, making money was secondary — enabling him to keep his family afloat and continue to do what he loved.)

But the financialization of the American economy has turned almost all larger businesses into profit centers. Private equity in particular has leached out every other value.

When I ask my former students how they like their work, I often hear the same story. “I like it well enough,” they say, often with a tinge of regret. “But the money people won’t let me do what I’d really love to do.”

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Off the Top of My Head

San Diego Moving Forward With Solution to Homeless Problem

by John Lawrence

The San Diego Union reported:

"The San Diego City Council voted 5-4 Tuesday [June 13, 2023] to adopt a controversial policy to ban homeless encampments on public property after hearing hours of public testimony.

"The ordinance was supported by Councilmember Stephen Whitburn, who proposed it, and Councilmembers Marni von Wilpert, Jennifer Campbell, Raul Campillo and Joe LaCava.

"Mayor Todd Gloria also supported what they referred to as an unsafe camping ordinance, with he and Whitburn saying it would address a public safety issue while also helping to get homeless people off the street and into a shelter and connected to services."

In approximate tandem with this ordinance is the City's plan to provide safe sleeping and camping areas and also to buy 3 motels and convert them to housing for the homeless. Father Joe also plans to build a high rise with additional rooms. The problem is that these additional housing units and camping areas are not ready yet. So this ordinance and the plan to provide additional shelter units will have to be somewhat compromised until the additional units are available. The opposition to the ordinance seemed to be based mainly on the fact that the additional units are not immediately available. The larger question is do the homeless have an unconditional right to live on public sidewalks which trumps the rights of downtown residents and business owners who also would like to use those sidewalks in a clean and safe manner. The answer in my mind is no they do not have an unconditional right to use the sidewalks as living areas. If I went downtown and set up a stand selling something, anything, I would be arrested if I did not have a license. However, homeless advocates would argue that the homeless have an unlimited right to sleep wherever they please on public sidewalks.

Finally, I think the Mayor and the City Council are taking a serious approach to this problem after farting around for decades. It amounts to government admitting that people have a right to housing - public housing or social housing, whatever you want to call it - something that American governments at all levels have never before been willing to concede. Once the units the City has promised come online, they need to expand that program since the proposed units are unlikely to be a once and for all solution. As rents are continuing to increase, the City has to be in the business of providing the SROs that the free market used to provide and now doesn't. Getting people off the streets and into housing or safe camping and parking areas with proper sanitation and other services accomplishes not only more humane conditions for the homeless. It prevents San Diego from becoming a tourist desert. Also residents and businesses will be moving out if the streets cannot be returned to their safe and proper usages. People living and running businesses downtown should have rights too. This argument that the new City ordinance is criminalizing homelessness is entirely bogus. If shelter beds or other accommodations are available, the homeless should be forced to take advantage of them IMHO. On the other hand,to the extent that these resources are not available, they should be cut some slack. That does not mean an unlimited right to park their tents wherever they please.

I noted the story of the parent pushing a stroller who was almost run over by a car because they could not use the blocked public sidewalk. I had a similar experience on Commercial street when my car was almost run over by the San Diego Trolley. The fact that the City will be providing SRO type rooms and other accommodations for the homeless as well as social services does not mean that that will be permanent housing for the contemporary homeless. The social workers will be attempting to reintegrate if possible currently homeless persons and families back into normal society. That means that they will be trying to find them jobs and get them living accommodations that they can pay for in the mainstream of society. Problem is that rents are so expensive that it will be impossible for many people, even if they have a job, to provide housing for themselves especially in San Diego where housing prices and rents are continuing their upward cost progression. That's why the next step for the City should be to do something about affordable housing. This means that the City needs to counteract the free market with respect to housing so that people who are reintegrated into society can at least function within the parameters of that society. The free market tendency for rents to keep on rising needs to be counteracted by the public sector. The free market will continue to make housing unaffordable which will result in more people becoming homeless. What is happening is that hedge funds are buying up housing units, rehabilitating them to some extent and turning them into rental units if they aren't rental units already thus driving up rents. People who in prior years could afford to buy a home now can't in the current environment. This process is turning more and more would be home owners into renters and renters who are devoting more and more of their income to paying rent.

The only way children of long time San Diego residents can buy homes today is if the parents can convert some of the equity in their homes to a down payment on the child's home so that they end up with a mortgage they can afford which is something I was able to do. I bought into the San Diego real estate market exactly 50 years ago for a house that I paid 3% of the market value of that same house today! There are companies that will make a home equity investment in your house which means that they will loan you money that you can use as a down payment on a child's house if that's the way you decide to use that money. There are no monthly payments. When the contract period - which can be as long as 30 years - is up, the house must be sold or the contract settled in some other way and the home equity investment must be repaid in proportion to the equity increase in value over that time period. Since I will probably not be here in 30 years, my heir, who can also inherit the contract, will sell the property and have to split the profits with the home investment company. Meanwhile, the property she bought with the down payment they provided and with a mortgage she can afford is increasing in equity. It's a pretty good solution, but only available to people who bought into the San Diego market when prices were cheap. The Home Equity Investment is like a reverse mortgage, but there is no age restriction and it can be used in conjunction with a rental property.

Off the Top of My Head

San Diego On the Way to Solving Homeless Problem

by John Lawrence

With a combination of safe sleeping and safe parking areas and also converting motel rooms into single occupancy units (SROs), San Diego is heading in the right direction for solving the homeless situation. This is combined with an ordinance that prohibits sleeping in public areas including sidewalks. Finally, a workable solution that gets the homeless off the streets, provides them with some amenities including sanitation facilities and makes the streets and city sidewalks safe for pedestrians again. As a tourist destination San Diego can't afford the spectacle of back to back tents crowding city sidewalks, and the provision of amenities in safe sleeping areas or city sponsored SROs makes the homeless at least somewhat better off than they are without any amenities on public sidewalks. The San Diego Union reported:

The properties being considered include three hotels and one apartment building.

One of the hotels is a 62-unit Ramada Inn on Midway Drive, which the Housing Commission agreed to pursue at its May 12 meeting when it unanimously agreed to apply for $18 million in Project Homekey funding. The estimated purchase price would be $11.6 million, equating to about $182,000 a unit, but adding kitchenettes and other upgrades would increase the overall cost to $29.5 million, or $469,000 a unit.

The city also is submitting a joint $4 million application with Wakeland Housing and Development Corp. to purchase a vacant 13-unit apartment building in Ocean Beach. Purchasing the building would cost $4.5 million, but rehabilitation expenses would increase the cost to $6.8 million, bringing the per-unit cost to $525,000.

The other two properties are a 107-unit Extended Stay America Hotel on Murphy Canyon Road for $40.7 million and a 140-unit Extended Stay America Hotel on Mission Valley Road for $52 million.

Essentially the city is taking the responsibility for providing public housing, something that was abandoned during the Reagan administration. The most dramatic cut in domestic spending during the Reagan years was for low-income housing subsidies. Reagan appointed a housing task force dominated by politically connected developers, landlords and bankers. In 1982 the task force released a report that called for “free and deregulated” markets as an alternative to government assistance – advice Reagan followed. In his first year in office Reagan halved the budget for public housing and Section 8 to about $17.5 billion. And for the next few years he sought to eliminate federal housing assistance to the poor altogether.

Public housing was stigmatized due to failed projects like Cabrini-Green. Cabrini–Green was home to 15,000 people, mostly living in mid- and high-rise apartment buildings. Crime and neglect created hostile living conditions for many residents, and "Cabrini–Green" became a metonym for problems associated with public housing in the United States. Now cities like San Diego are forced to take up the fallen banner for public housing under the metonym of  "housing the homeless". The state of California, however, is providing most of the funding.

Other cities have had no problem in providing low cost rental housing. Take Vienna for example, a city which has largely solved the worldwide crisis of soaring rents:

Experts refer to Vienna’s Gemeindebauten as “social housing,” a phrase that captures how the city’s public housing and other limited-profit housing are a widely shared social benefit: The Gemeindebauten welcome the middle class, not just the poor. In Vienna, a whopping 80 percent of residents qualify for public housing, and once you have a contract, it never expires, even if you get richer. Housing experts believe that this approach leads to greater economic diversity within public housing — and better outcomes for the people living in it.

People living in Vienna's social housing pay as little as 3% of their monthly salaries on rent. To boot the availability of low cost public housing keeps costs in the private housing market down.

In 2015, before they bought an apartment on the private market, the Schachingers were making about 80,000 euros ($87,000) a year, roughly the income of the average U.S. household in 2021. Eva and Klaus-Peter paid 26 percent and 29 percent in income tax, respectively, but just 4 percent of their pretax income was going toward rent, which is about what the average American household spends on meals eaten out and half a percentage point less than what the average American spends on “entertainment.” Even if the Schachingers got a new contract today on their unit, their monthly payments would be an estimated 542 euros, or only 8 percent of their income. Vienna’s generous supply of social housing helps keep costs down for everyone: In 2021, Viennese living in private housing spent 26 percent of their post-tax income on rent and energy costs, on average, which is only slightly more than the figure for social-housing residents overall (22 percent). Meanwhile, 49 percent of American renters — 21.6 million people — are cost-burdened, paying landlords more than 30 percent of their pretax income, and the percentage can be even higher in expensive cities. In New York City, the median renter household spends a staggering 36 percent of its pretax income on rent.

The article goes on:

Real estate is a place where money literally grows on tree beams. In the last decade, the typical owner of a single-family home acquired nearly $200,000 in appreciation. “Another word for asset appreciation is inflation,” the academics Lisa Adkins, Melinda Cooper and Martijn Konings write in “The Asset Economy,” “an increase in monetary value without any corresponding change in the nature of the good itself or the conditions of its production that would make it scarcer or justify an increased demand for it.” That inflation is creating a treacherous gulch between the housing haves and have-nots. Harvard’s Joint Center for Housing Studies found that, in 2019, the median net worth of U.S. renters was just 2.5 percent of the median net worth of homeowners: $6,270 versus $254,900. Last year, as higher interest rates slowed home sales and caused prices to plateau (and even soften in some overheated cities), the asking price of the median U.S. rental reached $2,000 a month, a record high, according to Redfin. Inflated rent prices line the pockets of landlords while preventing renters from saving for a down payment and ever getting off the treadmill.

Inflation in asset prices, particularly real estate, is causing more people, especially senior citizens, to fall into homelessness. The recent rise in interest rates which supposedly are aimed at curbing inflation have done nothing to bring the cost of housing down. In San Diego county, real estate is still appreciating in value despite the Fed having raised interest rates to highs not seen in recent years. It has done nothing to stop investors and hedge funds that pay cash. I reported previously:

In a deal with the Conrad Prebys Foundation, Blackstone Group, CEO'd by Steven Schwarzman, is buying 5800 rental units in San Diego. According to the San Diego Union, "The deal makes Blackstone one of the biggest real estate holders in San Diego County. It already owns $4.5 billion in assets here — including Legoland and the Hotel del Coronado. The transaction, which also includes Los Angeles-based investment firm TruAmerica as a partner, is expected to close in the next few weeks. The sale of the apartments was praised by Dan Yates, the president of the Conrad Prebys Foundation, who said the portfolio was assembled by Conrad Prebys — a San Diego developer — himself. Yates said the money from the deal will be used for grants primarily in San Diego."

Investors pay cash t buy up cheap rentals, and, therefore, the rise in interest rates doesn't affect them. They don't pay interest. They then give the tenants a 30 or 60 day notice depending on how long they've lived there. Then they refurbish the apartments and rent them out for twice the previous rent. This is the so-called "gentrification" of San Diego neighborhoods. This is why low cost rental units are disappearing just as all the SROs have disappeared. The policies now taking place by the city and county of San Diego to provide converted hotel housing and safe sleeping and parking areas will counteract this trend of higher and higher rents producing more and more homelessness. It's a policy that needs to be continued and increased. It cannot just be a one-off. Eventually, it will put a damper on the private rental market just as it did in Vienna.

Off the Top of My Head

Why the Republican Congress Will Drive the US into Default

by John Lawrence

Simply put it's in their interests to do so. They themselves will profit politically and financially. They will blame Biden for the default, and they will sell short their stock portfolios so that, when the stock market crashes, they will make money. Default doesn't mean that the US will not pay its debts. It means that going forward seniors on social security will not get their monthly checks. Neither will Federal workers or active duty military. However, since the US Treasury still has some money and money coming in from taxes, it will prioritize paying interest on Treasury bonds. So rich people that hold financial obligations of the US government will be paid while everyday average slobs will be left to suffer. This is exactly the type of solution Republicans have always sought. It fits in nicely with their modus operandi: cater to the rich and starve the poor and working class. Millionaires and billionaores will not suffer. Smart people who sell stocks short will not suffer. They will prosper. Financial wizards and private equity corporations will snap up distressed properties like a shark snapping up a school of fish.

The financial obligations of the US, money that has supposedly already been spent, is a misnomer. They represent money that has already been allocated by the previous Democratic controlled Congress. If Republicans had controlled the previous Congress instead, the money would never have been allocated. So it's not money that's already been spent, it's money that's already been allocated. The spending is in the future. The allocation was in the past. If Democrats controlled the present Congress, there would be no problem. Since it's up to the Congress both to allocate spending and to raise the debt limit, there is a whiplash if one party allocates the money and the other party is supposed to preside over the spending of the money. In a sense the Republican Congress is rebelling over the fact that, although they didn't allocate the money, they are supposed to preside over the spending of it.

Now Joe Biden could preempt the Congressional decision not to raise the debt limit by using unconventional but completely legal means, something that has never been done before. The Federal Reserve Act gives the power to print money to the Fed, However, the Coinage Act grants the Secretary of the Treasury rather broad coin seigniorage authority. The debt ceiling could be side stepped by ordering the West Point Mint to coin a 1 oz. $ 1 trillion coin. Treasury can then present the jumbo coin at the NY Fed to buy back $1 trillion in Fed-held debt (the Fed has to accept it, a creditor can’t refuse legal tender paid in to settle a debt). Or I see no reason why the Treasury couldn't simply deposit it in its account at the Fed thereby giving the US government the wherewithal to pay its bills. Esteemed economist Paul Krugman is all for the minting of the trillion dollar coin: "So go ahead, Democrats, and do whatever it takes to get through this. Gimmickry in the defense of sanity — and, in an important sense, democracy — is no vice."

Republicans would have you believe that spending is out of control. No, undertaxation is out of control especially undertaxing the rich. Economic inequality has soared reaching unprecedented new heights not seen even in the Gilded Age. As Joe Biden has proposed, the budget could easily be balanced and the debt paid down by taxing the rich. Republicans would have you believe that raising taxes is a policy that would have to be enforced on everyone including the poor and the middle class, but that, unfortunately for them, is not the case. It is not written in stone that raising taxes would have to apply to everyone. As Bernie Sanders, Elizabeth Warren, AOC and others have pointed out, raising taxes on the rich could not only balance the budget, but could solve the problem of social security shortfalls. Republicans are in the unenviable position of wanting to screw the working class while catering to the rich while holding on to their MAGA supporters, a large portion of whom are the working class.

So given the fact that Republicans don't care about social security or Medicare recipients, there is a good chance that they will not vote to raise the archaic debt ceiling and force the US into default not on its debt but on its ongoing payments to Federal workers, who they hate anyway, social security recipients, who they will cheerfully throw under the bus and active duty military who as MAGA supporters will cheer them on at their own expense. Meanwhile, Congressional Republicans, private equity corporations and billionaires will short the market and salivate over the cheap assets they will be able to snap up. In other words they will profit from a default.

Off the Top of My Head

Biden Has Changed the Narrative on Taxes

by John Lawrence

One of the great things that Biden has done is to take the tax issue away from Republicans. Remember when George H R Bush said, "Read my lips. No new taxes." The conventional wisdom at that time was that if taxes were raised, they would be raised on everyone from Joe Six Pack to Warren Buffet. It was also conventional wisdom that tax cuts would apply to everyone from the very rich to the very poor. The American public was not sophisticated enough to know that Republican tax cuts, although they would apply to everyone, were much more favorable to the rich than they were to the poor. Now Joe Biden has completely altered that narrative. In Joe Biden's world tax increases apply only to the rich and tax cuts apply only to the poor. What a major paradigm shift! Biden has repeated his mantra so many times that he wouldn't raise taxes on anyone making less than $400,000 that now that scenario is starting to take hold in the American mind.

It's about time. The American public is starting to wake up to the reality that the very rich pay taxes at a lower rate than a nurse or a teacher or a fireman. If you're a hedge fund manager, you can take advantage of the 'carried interest' loophole to pay less than your fair share. As economic inequality has soared in the era of easy money, the very rich could take advantage of all sorts of games to make themselves even richer while most working people are living paycheck to paycheck. One way to restore some measure of equality is to increase taxes on the rich while cutting them on the poor. This idea was unheard of even a few years ago. Republicans rue the day when it was heard of thanks to Joe Biden, Elizabeth Warren and Bernie Sanders among others. Another way to restore some semblance of equality would be to tax wealth in addition to taxing income. People with assets, say, more than $50 million should pay a tax on their wealth while middle class and poor should be given help to start creating wealth for themselves. That would probably be something to do with home ownership since this is the way most middle class people have been able to create wealth for themselves.

However, it is becoming increasingly difficult for people of modest means to create wealth through home ownership because real estate prices have gone through the roof. It has become increasingly difficult for young people to come up with a down payment for a house, much less to make their monthly mortgage payments. The net result is that more and more people are forced into the situation of never owning property and being life time renters. This is the plan as private equity and hedge fund managers have accessed easy low interest money to buy up real estate and then rent it out so that the typical middle income young family is now renting a home from a hedge fund. NBC News reports: "The lack of supply of single-family homes has pushed up housing prices in many markets across the country — but would-be homebuyers find they are being outbid not just by other home seekers, but also by hedge funds." Hedge funds like the Blackstone group come in with all cash offers which are more attractive to sellers than the terms that average Joes and Janes can come up with. The Real Deal reports:

"Blackstone Group is planning to buy about 5,800 apartment units in San Diego for more than $1 billion.

"The New York-based private equity and investment firm has agreed to purchase 66 complexes across the city from the Conrad Prebys Foundation, according to the San Diego Union-Tribune. It also plans to make $100 million in improvements to the properties.

"With the deal, Blackstone will own 6,700 units in the Southern California city. It already owns $4.5 billion of assets in the city, including the Legoland theme park and the historic Hotel del Coronado.

"“We look forward to ensuring that these properties continue to provide the community with a high-quality rental option at a good value,” Blackstone Real Estate’s global co-head, Kathleen McCarthy told the Union-Tribune.""

According to the San Diego Union, "The deal makes Blackstone one of the biggest real estate holders in San Diego County." The writing on the wall is that, if you want to own a home, you have to move out of San Diego where the median home price is $855,000. For instance the median home price in Indianapolis is $229,900.

Off the Top of My Head

Taxing the Rich Will Lessen the Need for Deficit Spending

by John Lawrence, January 29, 2021

Billionaires are upset because their hedge fund ploys in the Wall Street casino went awry when a group of average Joes countered their short sales of GameStop. Oh the tears that were shed. Billionaires losing millions gambling? Outrageous! Bernie Sanders tweeted: "Oh look, another billionaire is mad that he might have to pay more taxes while children in America go hungry and veterans sleep on the street. Cry me a river," Joe Biden's $1.9 trillion COVID relief bill will mean a lot of deficit spending which can be offset, however, by taxing these billionaires. A financial transaction tax would raise $2.4 trillion over the next decade—"enough to make public colleges tuition free and cancel student debt."

Casino Capitalism Lesson 1: Selling short. Here's how billionaire hedge fund managers planned to make a killing. They knew that GameStop was losing money and probably going out of business. GameStop closed 321 stores in 2019 alone and planned on closing even more stores by the end of 2020. So knowing that GameStop's stock was going down (it didn't take a big brain to figure that out), they sold its stock short. What that means is that they "borrowed" the stock from people that already owned it. Then they sold the stock at its value at that time. Some time later when they would have to "return" the stock to those they borrowed it from, they planned to buy it back at a lower price (it having gone down in the meantime) and pocket the difference. One might ask why the original owners of the stock would loan it in the first place since they must have known that the stock would be worth less when it was returned to them.

However, a group of "amateur" investors foiled the plans of the billionaires by buying GameStop stock thereby bidding up the price making it worth more when the short sellers had to return it, not less. That would mean that the short sellers would lose money instead of making money. That's when the billionaires cried, "Ouch!" Then the "amateurs" who bid up the stock could sell it at the higher price and make money. Woo Haa! Leon Cooperman, whose net worth is estimated to be around $3 billion, sniffed that "the reason the market is doing what it's doing is, people are sitting at home, getting their checks from the government, basically trading for no commissions and no interest rates." In other words average people trading stocks are making the money that billionaires like him should have made. Boo Hoo!

Modern Monetary Theory maintains that all the money for the COVID relief bill could be raised from deficit spending because deficits don't matter without any need for increased taxation. Yet it would be prudent to raise taxes on the mega rich in order to decrease economic inequality which represents an enormous chasm between the billionaire class and everyone else. A new report found that the world’s 2,153 billionaires have more wealth than 4.6 billion people, underscoring the degree of global inequality. This would also offset any decrease in the value of the dollar that large deficit spending might bring about. In The Deficit Myth by Stephanie Kelton, she points out that the Federal Reserve which creates US dollars can never run out of money since the US dollar is a sovereign currency, but there is a concern about inflation if too much money is created which doesn't have a productive purpose in the economy. Since so many are unemployed and since there is a huge infrastructure deficit, this is not in danger of happening any time soon. There is no lack of money for government programs since they don't depend on tax flows, and money created by the Federal Reserve that ends up on the Fed's balance sheet never has to be paid back.

While the Fed can create as much money as it likes to bail out the banks without Congressional approval, which it did during the 2008 banking crisis, money created for government spending, such as the $1.9 trillion COVID relief bill, must have Congressional authorization. Fortunately, there is a process known as budget reconciliation which only requires a majority vote and the Democrats have the majority in the Senate. Therefore, the COVID relief bill cannot be filibustered by Republicans which they surely would do if they were in the majority. So it's clear that Republicans only represent the interests of the rich who will contribute to their campaigns and enrich them in return as long as they vote to nullify everything that might help the average person or raise taxes on them.

The Neoliberal Looting of America

from the New York Times:

The private equity industry, which has led to more than 1.3 million job losses over the last decade, reveals the truth about free markets.

By Mehrsa Baradaran

Ms. Baradaran is the author of “The Color of Money: Black Banks and the Racial Wealth Gap.”

July 2, 2020

George Etheredge for The New York Times

“It’s hard to separate what’s good for the United States and what’s good for Bank of America,” said its former chief executive, Ken Lewis, in 2009. That was hardly true at the time, but the current crisis has revealed that the health of the finance industry and stock market is completely disconnected from the actual financial health of the American people. As inequality, unemployment and evictions climb, the Dow Jones surges right alongside them — one line compounding suffering, the other compounding returns for investors.

One reason is that an ideological coup quietly transformed our society over the last 50 years, raising the fortunes of the financial economy — and its agents like private equity firms — at the expense of the real economy experienced by most Americans.

The roots of this intellectual takeover can be traced to a backlash against socialism in Cold War Europe. The Austrian School economist Friedrich A. Hayek was perhaps the most influential leader of that movement, denouncing governments that chased “the mirage of social justice.” Only free markets can allocate resources fairly and reward individuals based on what they deserve, reasoned Hayek. The ideology — known as neoliberalism — was especially potent because it disguised itself as a neutral statement of economics rather than just another theory. Only unfettered markets, the theory argued, could ensure justice and freedom because only the profit motive could dispassionately pick winners and losers based on their contribution to the economy.

Neoliberalism leapt from economics departments into American politics in the 1960s, where it fused with conservative anti-communist ideas and then quickly spread throughout universities, law schools, legislatures and courts. By the 1980s, neoliberalism was triumphant in policy, leading to tax cuts, deregulation and privatization of public functions including schools, pensions and infrastructure. The governing logic held that corporations could do just about everything better than the government could. The result, as President Ronald Reagan said, was to unleash “the magic of the marketplace.”

The magic of the market did in fact turn everything into gold — for wealthy investors. Neoliberalism led to deregulation in every sector, a winner-take-all, debt-fueled market and a growing cultural acceptance of purely profit-driven corporate managers. These conditions were a perfect breeding ground for the private equity industry, then known as “leveraged buyout” firms. Such firms took advantage of the new market for high-yield debt (better known as junk bonds) to buy and break up American conglomerates, capturing unprecedented wealth in fewer hands. The private equity industry embodies the neoliberal movement’s values, while exposing its inherent logic.

Private equity firms use money provided by institutional investors like pension funds and university endowments to take over and restructure companies or industries. Private equity touches practically every sector, from housing to health care to retail. In pursuit of maximum returns, such firms have squeezed businesses for every last drop of profit, cutting jobs, pensions and salaries where possible. The debt-laden buyouts privatize gains when they work, and socialize losses when they don’t, driving previously healthy firms to bankruptcy and leaving many others permanently hobbled. The list of private equity’s victims has grown even longer in the past year, adding J. Crew, Toys ‘R’ Us, Hertz and more.

In the last decade, private equity management has led to approximately 1.3 million job losses due to retail bankruptcies and liquidation. Beyond the companies directly controlled by private equity, the threat of being the next takeover target has most likely led other companies to pre-emptively cut wages and jobs to avoid being the weakest prey. Amid the outbreak of street protests in June, a satirical headline in The Onion put it best: “Protesters Criticized for Looting Businesses Without Forming Private Equity Firm First.” Yet the private equity takeover is not technically looting because it has been made perfectly legal, and even encouraged, by policymakers.

According to industry experts, 2019 was one of the most successful years for private equity to date, with $919 billion in funds raised. The private equity executives themselves can also garner tremendous riches. Their standard fee structure involves collecting around 2 percent of the investor money they manage annually, and then 20 percent of any profits above an agreed-upon level. This lucrative arrangement also lets them tap into the very favorable “carried interest” tax loophole, allowing them to pay much lower capital gains tax rates on their earnings, rather than normal income taxes like most people.

An examination of the recent history of private equity disproves the neoliberal myth that profit incentives produce the best outcomes for society. The passage of time has debunked another such myth: that deregulating industries would generate more vibrant competition and benefit consumers. Unregulated market competition actually led to market consolidation instead. Would-be monopolies squeezed competitors, accrued political power, lobbied for even more deregulation and ultimately drove out any rivals, leading inexorably to entrenched political power. Instead of a thriving market of small-firm competition, free market ideology led to a few big winners dominating the rest.

 

 

 

 

 

 

 

 

Off the Top of My Head

#GreenNewDeal + #BlackLivesMatter = #TheWayForward

Affirmative Action for Blacks, Latinx and Native Americans in a Green New Deal

by John Lawrence, June 29, 2020

Living with the COBID pandemic could be the new normal. Assurances of a vaccine by the end of the year might be meaningless. Here's why: for many viruses including HIV, Ebola, malaria and tuberculosis there are no vaccines available despite years of study and years of effort to develop one. It took 100 years from the first polio epidemic in the US until a vaccine wiped out polio. Just as the Trump administration misled the American people in minimizing the effects of COBID including that things would normalize after we "flattened the curve" and giving dates by which we could "open up", they misled us by raising expectations that a vaccine would be available by the end of the year. Read the book, "Spillover", if you want authoritative scientific information about viruses and how long vaccine development takes if ever.

So, if the pandemic is something we have to live with indefinitely which could well be the case, the economy, in the way it existed before the pandemic, would never be coming back. So how do we create a new economy which works for the American people which, arguably, it was not working before the pandemic despite quasi full employment. Number 1: we refund the CDC and WHO which are the major institutions dealing with viruses and pandemics. Trump tried to defund CDC, and he did defund WHO in the midst of the pandemic. Politifact reported: "As for funding, there’s no question that the Trump administration sought to cut key CDC budget categories. But thanks to Congress, that funding was restored and even increased in bills that Trump ultimately signed." He had better luck and actually did defund WHO.

The biggest thing that could be done to minimize the bad outcomes for this and future pandemics is to get rid of Donald Trump as President of the US. A Democratic President would refund the CDC and WHO. The second thing would be to take a page out of FDR's book by reinstituting the Reconstruction Finance Corporation (RFC) which financed the New Deal including many infrastructure projects. In fact the Federal Reserve could finance a #GreenNewDeal without even tweaking the law. With the Special Purpose Vehicles (SPVs) it is now resorting to, it is financing debt relief not only for banks but for hedge funds, private equity funds, bankrupt corporations and even rich individuals. It is taking trillions on its balance sheet with quantitative easing. The SPVs require deal making with the Treasury Department. It would be a very small step for the Fed using a SPV to fund a Green New Deal. The US is about $4 trillion in arrears on infrastructure rebuilding and development. Instead of just bailing out bankrupt institutions the Fed could take a more positive role and actually fund productive development. By the way the RFC actually made money on repayment of loans and user fees as opposed to the Fed which just swallows US debt.

If no vaccine is found for COBID in a timely manner, the whole economy should be restructured because many businesses are not coming back. Many including Herz, J. Crew, Neiman Marcus and Chesapeake Oil have already filed for bankruptcy. A Green New Deal could take up the slack reducing the GDP from 70% consumerism to 50% which would be in line with the EU consumption component of GDP while increasing government investment by 20%. That would represent a full employment economy but it would be reoriented from consumption to building green infrastructure.

Minority hiring for a Green New Deal could be along the lines of affirmative action with African Americans, Latinx and Native Americans being hired first. This would go a long way to reduce inequality in America while being a form of reparations in light of the fact that slave labor built much of this country and Jim Crow redlining was responsible for the fact that black families have not been able to accumulate wealth at the same rate as white families. #BlackLivesMatter plus a #GreenNewDeal could help to restore the balance while at the same time creating a full employment economy.

Off the Top of My Head

Instead of Helping American Workers, the Fed Prints Money and Swallows US Debt

by John Lawrence, June 25, 2020

The Federal Reserve is printing trillions of dollars and buying US government debt. The market for US Treasury bonds is a hard sell these days because they pay so little interest: 1.37% for a 30 year bond, less than the inflation rate. China is dumping its Treasuries. It will probably accelerate the rate of dumping if tensions between the 2 countries continue. China was the US' largest creditor till recently when Japan took over that role. While the Federal Reserve has set interest rates effectively at zero, credit card companies are still charging as much as 30% interest which creates a huge number of Americans debtors especially when you throw in student loan debt which stands at $1.5 trillion. In fact, revolving consumer credit card debt reached nearly $1.1 trillion at the end of February 2020, according to the Federal Reserve G19 Report. Americans were paying as much as $121 billion in interest and fees combined by the end of 2019. That's no surprise since the Federal Reserve reported in February 2020 that the average interest rate on credit cards reached an astronomical 16.61%. While billionaires can borrow money at zero percent interest, average Americans pay 16% and up.

The effect of zero interest rates on savings accounts and Treasury bonds is to force everyone into the stock market which, although we're in a recession bordering on depression, continues to go up. It is totally divorced from reality; it wouldn't go down even in a depression like it did during the Great Depression. The Fed is keeping it artificially pumped up because so much American wealth is at stake there.

The Fed is buying Treasuries and mortgage backed securities (MBSs) to the tune of trillions of dollars. Wolf Street reported:

In March (2020) and April combined, the Fed monetized 100% of the additional Federal debt. Over the two-month period of March and April, the US government increased its debt by $1.56 trillion (most of it in April); and over the same two-month period, the Fed bought $1.56 trillion in Treasury securities (most of it in March) and thereby monetized 100% of the additional pile of debt during the two-month period.

The Fed is just swallowing all kinds of debt which is enriching the richest Americans and foreign banks even more. Problem is this forced feeding of cash by the Fed is not trickling down to the American people. It is not creating jobs. Now the Fed is creating even more ways to monetize debt by creating Special Purpose Vehicles (SPVs). These SPVs can buy assets the Fed is not allowed to buy, and they can lend to entities and rich individuals to buy certain assets. Under the arcane Federal Reserve Act, these SPVs require taxpayer backing from the Treasury Department to protect the Fed from losses. The SPVs can buy asset backed securities (ABSs) on a non-recourse basis which means that, if there are any problems, taxpayers take the losses. Indirectly via its Special Purpose Vehicles and its Primary Dealers, the Fed can buy even old bicycles, as long as taxpayers take the losses.

Wolf Street reported:

These ABS can be backed by credit card loans, auto loans, student loans, equipment loans, floor plan loans, insurance premium finance loans, some loans guaranteed by the Small Business Administration (SBA), and eligible loans on receivables. The loan amounts will be “equal to the market value of the ABS less a haircut and will be secured at all times by the ABS,” the Fed says.

A little history on Term Asset-Backed Securities Loan Facility (TALF) : At the end of 2010, under orders from Congress, the Fed released data on over 21,000 transactions it performed during the Financial Crisis, which revealed among many other outrageous acts, that the Fed lent to well-connected individuals and all kinds of hedge funds and others under its TALF program so that they would buy certain assets, such as these consumer loan ABS, drive up their prices, sell them to pension funds and others later for a huge profit, and pay back the loans to the Fed.

These well-connected individuals included John A. Paulson, Michael Dell, Christy K. Mack (wife of former Morgan Stanley CEO John Mack), Kendrick R. Wilson III (former Goldman executive and top aide to Hank Paulson Jr.), H. Wayne Huizenga (founder of AutoNation and Waste Management), Jonathan S. Sobel (head of Goldman’s mortgage department), etc. Some very wealthy people made a lot of money off the Fed’s bailout programs even as workers and the economy was in deep trouble.

So the Fed is paying John Paulson money by means of an SPV. Paulson is the guy who bet against the subprime mortgage market in 2007 and made one billion dollars in one day. Goldman Sachs had to pay him off, but eventually due to all the legerdemain in the financial markets, it was French and German taxpayers that paid him for his astute bet. That's casino capitalism at its best. Now he has direct access to the Federal Reserve's money printing press. Why? When there are so many poor and unemployed people in the US, why is the Fed intent on only bailing out financial markets, meaning rich people? Suffice it to say that the Fed is able to buy most anything from rich people and monetize their debt. Because of this and the fact that the rich can borrow at zero percent interest, they engage in risky bets. If they win, they pocket the money. If they lose, the Fed bails them out at zero percent interest.

Compare this with how the situation was dealt with during the Great Depression. Instead of force feeding wealthy people with interest free cash and adding trillions to the US National debt, FDR created the Reconstruction Finance Corporation (RFC). The original legislation establishing the RFC did not limit it to lending to financial institutions; it was also authorized to provide loans for railroad construction and crop lands. In other words it created jobs for average Americans. An amendment passed in July 1932 allowed the RFC to provide loans to state and municipal governments. The purpose of these loans was to finance projects like dams and bridges, and the money would be repaid by charging fees to use these structures. To help with unemployment, a relief program was created that would be repaid by tax receipts. Under the New Deal, the powers of the RFC were greatly expanded. The agency now purchased bank stock and extended loans for agriculture, housing, exports, businesses, governments, and disaster relief. The RFC actually made money on these loans.

So the RFC could actually create jobs for average working people (and not just for hedge fund managers) doing constructive things like building houses and infrastructure. Part of the New Deal was the Works Progress Administration (WPA) relief program which made the federal government by far the largest employer in the nation. A Green New Deal would create money much as the Fed does with a few keystrokes on a computer, but, instead of just providing liquidity to banks, hedge funds and rich people, it would provide money for productive jobs paid for by the government. The government needs to be employer of last resort in order to recreate a full employment economy.

A Green New Deal would convert the American economy from a fossil fuel dependent economy to one fueled by renewable energy. In so doing it would provide good paying jobs for those in American society who have been left out or left behind. The Fed should monetize the $3 trillion backlog in American infrastructure repair and rebuilding. Making the Fed a public bank instead of a bank whose main purpose is to swallow US government debt and give money to rich people in order to provide "liquidity" would go a long way to reducing inequality and bringing the American poor including minorities into the middle class. IMHO the COBID pandemic will insure that the old economy based on 70% consumerism is not coming back. The new normal will be based on government spending to create a Green New Deal or will sputter along at about half its former level.

Off the Top of My Head

How the World Could Change When the Current Crisis is Over

by John Lawrence, April 26, 2020

Perhaps we will rethink what is essential and what is inessential. Here's my list of what is essential: 1) Health care; 2) Food; 3) Water; 4) Sanitation (Waste water and trash collection); 5) Education; 6) Transportation; 7) Electricity; 8) The Internet; 9) Grocery stores. 10) Elder care.11) Police, Fire and Paramedic services. Here are some things that are considered inessential now: 1) Spectator sports; 2) Spectator music events; 3) Parades; 4) Conventions; 5) Bars; 6) Restaurants; 7) Barber and beauty parlors; 8) Tattoo parlors; 9) Political campaign events; 10) Large parties like wedding receptions.

Everyone can come up with their own list of what they consider to be essential and what they consider to be inessential. In my opinion the least essential of inessential services are tattoo artists. There are a lot of products and services in our mass consumer culture which are also frivolous and have nothing to do with what is essential or beneficial to human well being.. It seems that the most essential workers are the least paid while the least essential are well paid indeed. Is advertising really essential? You can look up everything you might want or need online using google or amazon. Why do you have to have some irrelevant product or service pounded into you by TV advertising? It's a historical relic. I record most programs so that I can fast forward through the commercials. If I watch a live program, I put it on pause while I do something else for awhile, and then I fast forward through the commercials. In my opinion everything advertised on TV, especially pharmaceuticals, is inessential. They should be prescribed by a doctor. It's the doctor's business to know which pharmaceuticals you need, not yours.

Are hedge funds essential? Is jewelry essential? Are the products of the wedding-industrial complex essential? Many people are having weddings during the pandemic without paying the tens of thousands of dollars that current weddings fashioned by the wedding-industrial complex demand. There are many frivolous consumer items which advertising insists that people need that they don't really need, that are completely inessential. Some are nice to have, but inessential, and some are downright destructive to peoples' health and welfare.

The most essential activity at this time in history is saving the planet from global warming. Production of renewable energy alternatives is absolutely essential. The provision of green infrastructure is absolutely essential. Fossil fuels need to be left in the ground. Getting rid of plastics which pollute the oceans and other waste products that aren't biodegradable is absolutely essential. Rethinking payscales for essential workers like agricultural workers and grocery store workers is essential. If these are the most essential workers, they should be paid more. The same goes for doctors, nurses, certified nursing assistants, the CNAs who do most of the caregiving at nursing homes. CNAs make little more than minimum wage and yet they are exposed to the coronavirus. What this means is that so much that is really essential now is either being ignored or very little money is being allocated to it while huge amounts of money are being allocated to fruitless and frivolous activities.

The most fruitless activity is war and the provoking of war. The trillion dollar annual budget of the military-industrial complex has been shown to be fruitless and meaningless when the real war is against a virus. Unhealthy conditions in poverty stricken areas of the world including refugee camps can breed disease which affects the whole world including "privileged" people in the more advanced nations. Poverty and disease need to be eradicated in all parts of the world. The military cannot do that. Oh, they can be repurposed a little bit to help out with a pandemic, but they can not really do the job that needs to be done. In particular they are vulnerable to the pandemic themselves and all of the weapons of war cannot protect them. The real war needs to be against poverty and disease which are the breeders of war and pandemics. The real war needs to be against global warming. The real essential workers are construction workers who need to be constructing advanced green infrastructure.

What is clear is that real essential workers need to be paid more which argues for a lessening of economic inequality. So much of the wealth is held by people who are absolutely inessential to the health, welfare and betterment of people all around the world. A Green New Deal needs to be prioritized. Wealth needs to be taxed to pay for it. New York state needs to tax Wall Street to make up for its budget deficit. Priorities, priorities. The helping professionals and care workers need to be given more respect and money. Taxing inessential workers like hedge fund managers is what needs to pay for it.

Off the Top of My Head

The Solution for New York State's Budget Crisis: A Wealth Tax on Wall Street

John Lawrence

There's a storm a'brewing between Governor Andrew Cuomo and Mitch McConnell, the Senate majority leader. New York is facing a $15 billion revenue shortfall due to the coronavirus. Cuomo wants the Federal government to fill the gap, but Mitch has said, "Let the states go bankrupt." McConnell has told the blue states,"Drop Dead." New York state is a democratic state which won't vote for Donald Trump so McConnell is now all concerned about the budget deficit. The solution lies in the fact that New York City, the richest city in the world is located in New York state. Wall Street, home of the biggest and richest banks in the world is located in New York City. JPMorgan Chase's CEO Jamie Dimon is a billionaire. Goldman Sachs' CEO, Lloyd Blankfein, is a billionaire. Wall Street banks have just been given $1.5 trillion by the Federal Reserve. Besides that between 2008 and 2015, the Federal Reserve contributed about $4.5 in quantitative easing (QE) to the big Wall Street banks.

In addition New York is the hedge fund capital of the universe. They are worth trillions of dollars. So a wealth tax on Wall Street billionaires, banks and hedge funds could easily fill New York State's budget gap. In addition to that consider Manhattan real estate. The median price of homes currently listed in Manhattan is $1,550,000. At $238 million, 220 Central Park South penthouse is the most expensive home sold in the U.S. Come on, Governor Cuomo. Just raise the property taxes on Manhattan real estate. Property tax is a wealth tax. A wealth tax on New York City assets could easily fill the budget gap. What are you waiting for? Democrats control the majority in both houses of the New York State legislature. No Mitch McConnell there. The state can just vote to raise taxes on billionaires, banks and hedge funds.

OK, here's the likely scenario. If Cuomo proposes a wealth tax on Wall Street banks, hedge funds and billionaires, all of which have received massive bailouts from the Federal Reserve, the affected parties will massively lobby New York state legislators and Republicans at the national level including Mitch McConnell. According to New York Public Radio in 2012:

Hedge funds, hedge fund executives, and their immediate family members gave $23.4 million dollars to state and local politicians from the start of 2005 through February of this year, according to a report released Wednesday by Common Cause New York, an advocacy group that campaigns for open government.

While this is the first time Common Cause has tracked these donations in New York, contributions from the hedge funds in federal campaigns leapt from only $2.4 million in 2000 to $19 million in 2008.

I'm sure the affected parties have contributed much more since 2012 and will ride McConnell's ass and ply him and other Republicans with money, and then Congressional Republicans will change their tune regarding bailing out New York state. The result will be that New York state will not have to tax Wall Street although 15 billion is just a small blip on one billionaires' balance sheet. Remember a billion is a thousand million. C'mon, Governor Cuomo, it's a no brainer.

The System: Who Rigged It, How We Fix It

by Robert Reich

Tuesday, March 24, 2020

The coronavirus has starkly revealed what most of us already knew: The concentration of wealth in America has created a a health care system in which the wealthy can buy care others can’t. 

It’s also created an education system in which the super-rich can buy admission to college for their children, a political system in which they can buy Congress and the presidency,  and a justice system in which they can buy their way out of jail. 

Almost everyone else has been hurled into a dystopia of bureaucratic arbitrariness, corporate indifference, and the legal and financial sinkholes that have become hallmarks of modern American life.

The system is rigged. But we can fix it.

Today, the great divide in American politics isn’t between right and left. The underlying contest is between a small minority who have gained power over the system, and the vast majority who have little or none. 

Forget politics as you’ve come to see it – as contests between Democrats and Republicans. The real divide is between democracy and oligarchy.

The market has been organized to serve the wealthy. Since 1980, the percentage of the nation’s wealth owned by the richest four hundred Americans has quadrupled (from less than 1 percent to 3.5 percent) while the share owned by the entire bottom half of America has dropped to 1.3 percent [Saez & Zucman]. 

The three wealthiest Americans own as much as the entire bottom half of the population. Big corporations, CEOs, and a handful of extremely rich people have vastly more influence on public policy than the average American. Wealth and power have become one and the same.

As the oligarchs tighten their hold over our system, they have lambasted efforts to rein in their greed as “socialism”, which, to them, means getting something for doing nothing.

But “getting something for doing nothing” seems to better describe the handouts being given to large corporations and their CEOs. General Motors, for example, has received $600 million in federal contracts and $500 million in tax breaks since Donald Trump took office. Much of this “corporate welfare” has gone to executives, including CEO Mary Barra, who raked in almost $22 million in compensation in 2018 alone. GM employees, on the other hand, have faced over 14,000 layoffs and the closing of three assembly plants and two component factories.

Our system, it turns out, does practice one form of socialism – socialism for the rich. Everyone else is subject to harsh capitalism.

Socialism for the rich means people at the top are not held accountable. Harsh capitalism for the many, means most Americans are at risk for events over which they have no control, and have no safety nets to catch them if they fall.

Among those who are particularly complicit in rigging the system are the CEOs of America’s corporate behemoths. 

Take Jamie Dimon, the CEO of JPMorgan Chase, whose net worth is $1.4 billion. He comes as close as anyone to embodying the American system as it functions today.

Dimon describes himself as “a patriot before I’m the CEO of JPMorgan.”

He brags about the corporate philanthropy of his bank, but it’s a drop in the bucket compared to his company’s net income, which in 2018 was $30.7 billion – roughly one hundred times the size of his company’s investment program for America’s poor cities. 

Much of JP Morgan’s income gain in 2018 came from savings from the giant Republican tax cut enacted at the end of 2017 – a tax cut that Dimon intensively lobbied Congress for.

Dimon doesn’t acknowledge the inconsistencies between his self-image as “patriot first” and his role as CEO of America’s largest bank.
He doesn’t understand how he has hijacked the system.

Perhaps he should read my new book.

To understand how the system has been hijacked, we must understand how it went from being accountable to all stakeholders – not just stockholders but also workers, consumers, and citizens in the communities where companies are headquartered and do business – to intensely shareholder-focused capitalism.

In the post-WWII era, American capitalism assumed that large corporations had responsibilities to all their stakeholders. CEOs of that era saw themselves as “corporate statesmen” responsible for the common good.

But by the 1980s, shareholder capitalism (which focuses on maximizing profits) replaced stakeholder capitalism. That was largely due to the corporate raiders – ultra-rich investors who hollowed-out once-thriving companies and left workers to fend for themselves.

Billionaire investor Carl Icahn, for example, targeted major companies like Texaco and Nabisco by acquiring enough shares of their stock to force major changes that increased their stock value – such as suppressing wages, fighting unions, laying off workers, abandoning communities for cheaper labor elsewhere, and taking on debt – and then selling his shares for a fat profit. In 1985, after winning control of Trans World Airlines, he loaded the airline with more than $500 million in debt, stripped it of its assets, and pocketed nearly $500 million in profits.

As a result of the hostile takeovers mounted by Icahn and other raiders, a wholly different understanding about the purpose of the corporation emerged.

Even the threat of hostile takeovers forced CEOs to fall in line by maximizing shareholder profits over all else. The corporate statesmen of previous decades became the corporate butchers of the 1980s and 1990s, whose nearly exclusive focus was to “cut out the fat” and make their companies “lean and mean.”

As power increased for the wealthy and large corporations at the top, it shifted in exactly the opposite direction for workers. In the mid-1950s, 35 percent of all private-sector workers in the United States were unionized. Today, 6.4 percent of them are.

The wave of hostile takeovers pushed employers to raise profits and share prices by cutting payroll costs and crushing unions, which led to a redistribution of income and wealth from workers to the richest 1 percent. Corporations have fired workers who try to organize and have mounted campaigns against union votes. All the while, corporations have been relocating to states with few labor protections and so-called “right-to-work” laws that weaken workers’ ability to join unions.

Power is a zero-sum game. People gain it only when others lose it. The connection between the economy and power is critical. As power has concentrated in the hands of a few, those few have grabbed nearly all the economic gains for themselves.

The oligarchy has triumphed because no one has paid attention to the system as a whole – to the shifts from stakeholder to shareholder capitalism, from strong unions to giant corporations with few labor protections, and from regulated to unchecked finance.

As power has shifted to large corporations, workers have been left to fend for themselves. Most Americans developed 3 key coping mechanisms to keep afloat.

The first mechanism was women entering the paid workforce. Starting in the late 1970s, women went into paid work in record numbers, in large part to prop up family incomes, as the wages of male workers stagnated or declined. Then, by the late 1990s, even two incomes wasn’t enough to keep many families above water, causing them to turn to the next coping mechanism: working longer hours. By the mid-2000s a growing number of people took on two or three jobs, often demanding 50 hours or more per week.

Once the second coping mechanism was exhausted, workers turned to their last option: drawing down savings and borrowing to the hilt. The only way Americans could keep consuming was to go deeper into debt. By 2007, household debt had exploded, with the typical American household oweing 138 percent of its after-tax income. Home mortgage debt soared as housing values continued to rise. Consumers refinanced their homes with even larger mortgages and used their homes as collateral for additional loans.

This last coping mechanism came to an abrupt end in 2008 when the debt bubbles burst, causing the financial crisis. Only then did Americans begin to realize what had happened to them, and to the system as a whole. That’s when our politics began to turn ugly.  

So what do we do about it?

The answer is found in politics and rooted in power.

The way to overcome oligarchy is for the rest of us to join together and form a multiracial, multiethnic coalition of working-class, poor and middle-class Americans fighting for democracy.

This agenda is neither “right” nor “left.” It is the bedrock for everything America must do.

The oligarchy understands that a “divide-and-conquer” strategy gives them more room to get what they want without opposition. Lucky for them, Trump is a pro at pitting native-born Americans against immigrants, the working class against the poor, white people against people of color. His goal is cynicism, disruption, and division. Trump and the oligarchy behind him have been able to rig the system and then whip around to complain loudly that the system is rigged.

But history shows that oligarchies cannot hold on to power forever. They are inherently unstable. When a vast majority of people come to view an oligarchy as illegitimate and an obstacle to their wellbeing, oligarchies become vulnerable.

As bad as it looks right now, the great strength of this country is our resilience. We bounce back. We have before. We will again.

In order for real change to occur – in order to reverse the vicious cycle in which we now find ourselves – the locus of power in the system will have to change.

The challenge we face is large and complex, but we are well suited for the fight ahead.

Together, we will dismantle the oligarchy.

Together, we will fix the system.

Off the Top of My Head

The Federal Reserve's Role is to Bail Out Wall Street, Not the American People

by John Lawrence, March 21, 2020

The purpose of the Federal Reserve is to bail out the banks, not to bail out you. During the Great Recession of 2008, the Fed gave trillions to the banks. The average Joe that couldn't pay his mortgage lost his home to foreclosure. Banks only keep a portion of their money as reserves. They create loans out of thin air. If someone can't make payments on a loan, the bank will foreclose. If the loan is secured by property, that property will become the bank's property. If at the same time more people want to take their deposits out of the bank than the bank has in reserves, the bank is in trouble. That's where the Federal Reserve comes in. It floods the bank with liquidity meaning the cash to pay out to the bank's customers who want their money back. At the same time the Fed may take the bank's non performing loans onto its balance sheet. No one cares if the Fed has a bunch of non performing loans on its balance sheet. They can just stay there ad infinitum.

What happened during the Great Recession was that, thanks to financial instruments called derivatives, banks were liable for a lot more money than simple mortgages and other retail loans. They had committed to covering bets like interest rate swaps or collateralized debt obligations (CDOs) without understanding the liabilities they had agreed to. Derivatives represent gambles. A hedge fund will bet that an underlying security will go up or go down. When they win their bets, as they did in 2008, mainly due to foreclosures, it is similar to a run on the bank only a lot more money is at stake. Certain banks and financial institutions did not have the money to pay off the bet. So the Fed stepped in and paid off the bet for them. This was how the financial crisis was resolved. All the gamblers were made whole by the Federal Reserve. All the bets were paid off and very few financial institutions had to go out of business. Lehman Brothers was one institution that did go bankrupt and was liquidated.

The Fed can control how much money is sloshing around in the economy by raising or lowering the prime interest rate. That's the interest rate a bank pays to borrow money. The bank then charges the average Joe a lot higher interest rate, and they make money on the spread. Obviously, the Fed doesn't want the retail banks to make foolish loans that won't be paid back because then it will have to bail out the banks that made such loans. However, this is exactly what led to the 2008 financial crisis. The banks were making "liar loans" base on stated income. A waitress could go into the bank and just state her income was $125,000. a year. There was no checking. She was given a mortgage to buy a house. Then, when she couldn't make the payments on the house, the bank foreclosed. When the bank couldn't resell the house and get its money back, the bank's reserves were diminished and finally it couldn't meet its obligations. That's when the Fed stepped in with more liquidity. The Fed just created money out of thin air the same way the banks created money for loans, and flooded the banking system with it.

Average people lost their homes and their jobs, but investors and gamblers who had bet that the economy would collapse were paid off. This is the solution that Obama oversaw that was created by his protege Tim Geithner, Obama's Secretary of the Treasury. Now the question might be asked why the gamblers who had bet that the economy would fail were paid in full because the Federal Reserve created the money out of thin air to pay them while there was no money created to bail out the American people who had lost their homes and their jobs. Why was their no money created to alleviate the suffering? That's because that's not the Fed's job. The Fed's job is to bail out the banks. Hedge fund manager John Paulson made an estimated $2.5 billion during the crisis by betting against the housing market.

It doesn't take a genius to see that the US might have better spent its money by more widely distributing the trillions that the Fed created rather than paying off a hedge fund manager to the tune of a couple billion dollars, but again that's not the Fed's job. It should have been Obama's job to step in and demand that investor/gamblers not be paid, and that the Fed's trillions of dollars that it created go to the average John and Jayne that lost everything. But that's not how things work in the US capitalist economy. The Fed is not beholden to the American people. It's only beholden to the banks, and even there, it can decide which ones it wants to fail (Lehman Bros.) and which ones it wants to bail out (every other bank).

The trillions of dollars created by the Federal Reserve in its Quantitative Easing (QE) program go directly into the hands of investors meaning rich people. This does not "trickle down" to the American public. So it's no mystery why economic inequality is increasing, why the rich are getting richer and the poor are getting poorer. Much is made about how the Federal Reserve is "independent" from the Federal government. That's because it is a privately owned, wholly owned subsidiary of the big banks. It is literally owned by Wall Street and it's only beholden to Wall Street. It only serves the American public in the sense that it keeps the financial system operating smoothly supposedly.

Consider the alternative. A public bank, one beholden to the American people or its representatives, would have been able to direct the money flow at least partially to the direct alleviation of suffering of the American people during a recession or a depression. The Reconstruction Finance Corporation served the role during the Great Depression of getting money directly to state and local governments and to the American people. It supported banks as well, but the monies also flowed directly into the economy without having to take the form of loans created by the Wall Street banks. It was more hands on in bailing out certain industries.

A public bank, such as exists in North Dakota, can make loans directly to people and small businesses. It doesn't deal in fancy derivatives and is accountable not to the banking system but to the people in general. In North Dakota's case it's accountable to the people of North Dakota to whom it returns its profits. The Central Bank of the United States could be a public bank on the national level which would replace the Federal Reserve with the mandate of supporting the American people directly as well as the banking structure. It would not deal in derivatives which only benefit hedge funds and drive inequality.

The coronavirus could induce another Great Depression depending on how long it lasts. However, don't expect the Federal Reserve to protect the American people although it will protect Wall Street. No investor/gambler need fear losing their money. In fact the John Paulsons of the world, who have probably already taken out fantastic bets that the economy will go down, stand to make billions supplied of course by the Federal Reserve which will create the money out of thin air. This sloshing around of money will be scooped up by the billionaire class. Then the Federal government will come through on the fiscal side to supply aid of some sort to the American people while adding all this money to the national debt.

Off the Top of My Head

Turkish Groups Are Building 10,000 Houses for Refugees While US Builds Zero for Homeless

by John Lawrence, January 26, 2020

January 23, 2020 - NY Times reports:

ANKARA — Turkish aid groups have begun building more than 10,000 houses in Syria's northwestern province of Idlib to shelter growing numbers of people displaced by fighting, while Turkey seeks to prevent a new influx of migrants fleeing from Syria.

The houses are being erected near a Syrian village next to the Turkish border, an area so far spared from the air strikes and fighting which have uprooted hundreds of thousands of people.

Syrian and Russian forces have bombarded rebel-controlled targets in Idlib this week despite a deal between Turkey and Russia, which back opposing sides in the conflict, for a Jan. 12 ceasefire. On Thursday Russia said hundreds of Syrian militants launched attacks on Syrian government forces in Idlib.

Turkey already hosts more than 3.5 million Syrian refugees and fears that the fighting in Idlib - the last notable rebel stronghold in Syria after almost nine years of conflict - could drive millions more across the border. ...

"We provide food and clothes to the families on the migrant trail, but we also need to provide them shelter throughout the winter months," IHH Deputy Chairman Serkan Nergis said.

Nergis said the houses would provide better shelter than the existing tent camps near the border. The houses "will begin hosting their guests in a few days", with the goal of accommodating 60,000 people, Nergis said. ...

Turkey's Kizilay aid group also said this week it will build 1,000 emergency housing units in Idlib, which would be completed in 2-3 weeks.

Meanwhile, the US, both at the state and national levels, dithers for years and years and has not built one house for the 500,000 homeless people in the US. If Turkey can build 1000 housing units in 2-3 weeks, it seems that the US should be able to build just one here in the 30 years this crisis has been developing. There is also the issue that the US should be doing more to help Middle East refugees since the American military did a lot to create them.

However, the best that the City of San Diego and other California cities can do is to provide safe parking lots so that homeless people with vehicles can park them there and sleep there. It's a far cry from some Third World country able to build 1000 houses in 2-3 weeks. The US and California in particular have been dithering for years while housing prices and rents have skyrocketed to the point that only hedge funds and a few rich people can afford to buy a house any more. The hedge fund Blackstone boasts on its website: "We are a global leader in real estate investing. We seek to utilize our global expertise and presence to generate attractive returns for our investors and to make a positive impact on the communities in which we invest."

The Sothebys International Real Estate site says: "The Sotheby's International Realty® network provides access to luxury real estate and homes for sale worldwide. Our website lets you search property listings globally, and includes a large inventory of luxury homes for sale. Our listings include all types of homes, including houses, condos, townhomes, villas and more. We can also match your lifestyle choices such as waterfront, golf, island, vacation, mountain and many others." Berkshire Hathaway Home Services boasts "Berkshire Hathaway HomeServices is a real estate brokerage franchise network designed for today’s real estate market. From first time homebuyers to high-end residential markets to middle-market communities to commercial real estate, our franchisees are down to earth, nimble and local experts. This network of members and agents wouldn’t be a part of the Berkshire Hathaway HomeServices network if they weren’t."

All the free money the Fed is pumping into the economy, which hedge funds have access to, is driving up the cost of real estate just as it is bidding up the stock market. These guys know that so they buy low and as the real estate market appreciates, they sell high and higher. This effectively prices the little guy out of the market - both the home buying market and the rental market - creating  ever more homeless people including those who have at least one asset - their car. The homeless are really US internal refugees. Other countries like Turkey actually help refugees and build houses for them in their home countries so they don't flood across the border. The US neither builds homes for its homeless population nor does it build homes for poor people in Central America who are attempting to flood across US borders.

Off the Top of My Head

Homelessness is What Happens When You Let the Free Market System Take Over

by John Lawrence

In an article in The California Sunday Magazine titled "3 kids. 2 paychecks. No home." about a family with two working parents that can't afford a 2 bedroom apartment in Salinas, the industrial and economic center of Monterey County, California. Salinas is the hometown of John Steinbeck and where the Steinbeck Museum is located. Steinbeck was one of the most prolific of American authors. He wrote "The Grapes of Wrath" among other novels about the homeless and poverty stricken families in the Great Depression. He wrote about the homeless guys in Monterey who lived in a place they called the Palace Flophouse in "Cannery Row" Many of his books were turned into movies including Grapes of Wrath starring Henry Fonda, Jane Fonda's Dad.  Jane Fonda at age 81 is still getting herself arrested in Washington, DC for protesting about climate change.

So what's new? Steinbeck wrote about the poverty in the Salinas Valley. Candido and Brenda and their 3 kids are living out of a Toyota Sienna in a Salinas Food 4 Less parking lot.

"Now they were in the parking lot of Natividad Medical Center, just outside the emergency room. The lot was well lit, and there were bathrooms in the ER waiting room, open 24 hours. The hospital staff was mostly welcoming. At night, however, after everyone fell asleep, Candido had been noticing the tiny flicker of a lighter in a nearby pickup truck and the profile of an older man. Candido kept the van’s dome light on and made sure its doors were locked."

Steinbeck's "The Grapes of Wrath" was burned and banned. Steinbeck received death threats and the FBI put him under surveillance. He was called a communist. That was before he was awarded the Nobel Prize for Literature. The book was banned in many libraries and copies were symbolically burned in towns across America. There is in America a refusal to acknowledge the rights of its poorest citizens to a life of the barest necessities for them and their children. Steinbeck wrote about poverty in the 1930s and 40s. He probably thought that his novels might have convinced enough Americans that every citizen should be entitled to a basic level of existence, but he would have been wrong about that. Almost 100 years later the situation has only gotten worse for the homeless.

"Mornings were the hardest. Everyone was achy, tired from a bad night’s sleep, and on this morning, too, it was all they could do to keep to their routine. Brenda and Candido insisted on maintaining a semblance of order. “We’re not like some people,” Candido would tell the kids. “We wash our clothes. We don’t pee outside. We keep ourselves clean.” In the hospital bathroom, while Candido got ready to go to work and Brenda stayed behind with Adelene, Frankie helped wash and dress Josephat, brushing his brother’s teeth, then his own. Breakfast was whatever Pop-Tarts or granola bars were left over from the food bank. Finally, they straightened up the van, pulled the seats back into position, and put on their seat belts, Adelene in her car seat, Frankie and Josephat in their boosters. They drove the 15 or so minutes into town, fusing with the early traffic, indistinguishable from all the other families starting their day.

"When the van stopped, the boys hopped out. They went around to the trunk, grabbed their backpacks off the built-in clothing hooks, hugged their parents, and walked through the front gate of their elementary school."

Wages for working people haven't gone up indexed for inflation since the Reagan revolution of 1980 which ushered in the second Gilded Age. Meanwhile, billionaires have accumulated more and more money not by building railroads like Jay Gould did in the first Golden age or by developing the steel industry like Andrew Carnegie did, but by manipulating financial instruments. In many cases these financial industries were hedge funds which took over industries like the Hostess Baking Company, manufacturer of Twinkies, loaded it with debt, paid themselves handsomely and then let the industry go bankrupt while thousands of employees lost their jobs. Hedge funds engage in vulture capitalism which seeks to strip a functioning company of its assets, while management and executives feast on the carcass before it is stripped bare and the employees are left to rot, many of them on the streets.

"Today, the region’s 91,000 farmworkers live with stagnant wages (the median pay for farmworkers is $12.79 per hour) and the constant threat of ICE (the majority of these laborers are undocumented). Public health officials describe an epidemic of malnutrition among the workers and their families, and hunger has become widespread. The perverse irony that “The Valley That Feeds the Nation,” the title of a colorful mural in nearby Soledad, is now struggling to feed itself has been lost on nobody. Activists argue that a lack of fair wages in agriculture, in particular, is a key driver of this food insecurity. But for now, charity is what the industry is willing to offer. Last year, at the Food Bank of Monterey County, much of the 12 million pounds of emergency food assistance it provided was donated by agricultural companies"

The Salinas Valley supplies the world with lettuce. Recently this lettuce has been banned because it has been contaminated with E. Coli. bacteria. A spokesman for the CDC said, “Heading into the Thanksgiving holiday, it is critically important to avoid buying or eating romaine lettuce from the Salinas growing area so you can protect yourself and your family.” Is this divine retribution for the many years that wealthy agricultural corporations have refused to pay their workers a living wage? A living wage would be one that allowed its workers to rent a 2 bedroom apartment in Salinas.

"By far the greatest difficulty facing Salinas families, though, is the disappearance of affordable rental housing. In recent years, tech workers from the Bay Area have been relocating to Monterey County, and there are currently plans for a commuter rail that would run from the heart of Silicon Valley to Salinas. This influx of higher-earning tenants into an already congested market has led to a rise in rents, which in turn — together with the exclusionary zoning, no-fault evictions, and barriers to new construction that have beleaguered the rest of the state — is creating unprecedented housing instability among Salinas’s working poor. Over the past eight years, there has been a 37 percent loss of low-rent units in the city, while rents have shot up by almost 60 percent since 2014 — roughly four times the national average. According to the National Low Income Housing Coalition, the “housing wage” necessary to afford a modest two-bedroom apartment in Salinas, whose costs now exceed those of Miami and Chicago, is $29.62 per hour."

It should be pointed out that waiting for the free market to build housing that poor people can afford is like Waiting for Godot. In the play, of course, Godot never arrives. The only trend line in the case of housing is for more and more people especially older and sicker people to be kicked out onto the street. That is the absolute right of landlords to do so if the tenants cannot come up with the rent. In California there is a tiny glimmer of hope, however, as a rent control law will go into effect January 1, 2020. This law will limit rent increases to 5% a year, small comfort to those whose wages will not go up by that amount and who cannot afford the inflated rental prices in the first place.

"Increasingly, the city’s residents have found themselves bereft of adequate shelter altogether. “There’s always been poverty here,” said Reyes Bonilla, who runs Community Homeless Solutions, a local nonprofit. “But homelessness on this scale? It’s an entirely new thing.” He added that many of those coming to his organization for support defy the stereotypes about homelessness: The vast majority of them are working and have simply been priced out of a place to live. Families are doubling and tripling up in overcrowded, substandard conditions; they’re resorting to garages and toolsheds, cars and abandoned properties. In Monterey County, approximately 8,000 schoolchildren were homeless last year, more than San Francisco and San Jose combined. For many of these kids, the safest, most dependable part of their lives is the school they attend."

If there is little hope for a better life even among families in which 2 parents are working full time, what does this say about the future of America? It is the recipe for more gang violence, more drug trafficing, more lives lived on the lam. If one cannot support one's family by legal means, people often resort to illegal means and violence usually goes right along with it. This is the recipe that has been followed in poverty stricken areas of Honduras and Guatemala resulting in mass migrations to the US border of people fleeing poverty and violence. But here, even if they got in, they would only find more poverty and the result of not even having a roof over their heads which they probably had where they came from where rents are not so outlandish.

The US could do a lot to ameliorate this situation not only here but abroad as well. Instead, America is focused on spending a trillion dollars a year on a military-industrial complex whose main job is to use violence towards poor people who have been driven to violence because they have no hope their situations will ever get better any other way. Economic inequality is only getting worse with larger and larger shares of GDP going to those who already have more money than they could possibly spend in a 100 life times while the poor, if they're lucky, live out of Toyota Siennas.

Off the Top of My Head

Pirate Equity Firms Destroy Good Paying Jobs While Making Wall Street Investors Rich

by John Lawrence, August 8, 2019

How it works: Fund managers with Wall Street connections can borrow unlimited sums of money to buy out all the shares of some company, usually a retail company like Toys R Us. They then strip the company of its assets and load it up with debt. They then take the company into bankruptcy firing all the employees. Result: millions of good paying middle class jobs are eliminated. Fund managers and their investors become rich.

From United for Respect:

Debbie Mizen lives in Youngstown, Ohio, and began working at Toys “R” Us in 1987. She was a single mother when she started working and was able to care for her three children on her modest salary. Debbie was an assistant manager for the last 12 years of her career, although she knew she was earning less than male supervisors in the same position. In June 2018, she lost a job she loved when Toys “R” Us liquidated and closed over 800 stores across the country. Debbie found out that her store was closing on same day as her mother’s funeral and was devastated. Since her store closed, she has faced unemployment. When her unemployment checks ran out, she had to take a job in a grocery store collecting grocery deliveries for customers while earning half of what she did at Toys “R” Us. She is turning 67 this year.

Pirate Equity is ruining millions of lives, making fund managers rich and driving (among other factors) the economic divide between the 1% and the 99%. In the last decade pirate equity has led to 1.3 million job losses - mainly in retail jobs. 10 out of the 14 largest retail chain bankruptcies since 2012 were at private equity-acquired chains. Then the Wall Street executives use the carried interest loophole and offshore bank accounts to escape from paying taxes. A wave of high-profile retail bankruptcies in the last few years — including household names like RadioShack, Toys “R” Us, Sports Authority, Payless ShoeSource, Sears, and Kmart — have impacted retailers owned by Wall Street.

Hostess Twinkies is another example of a company that was taken over by pirate equity which then fired thousands of workers. I delved into this in a 2012 article in the San Diego Free Press (Twinkies’ Twisted Tale: Junk Food Devoured By Junk Bonds):

All the late night talk shows laughed it up over the supposed demise of Twinkies, Ho Hos, Ding Dongs, Wonder Bread etc as the news came out that Hostess Brands was going bankrupt. But delve beneath the surface and you will find something more akin to a Shakespearean tragedy than talk show banter.

It’s a tale involving two unions, one private equity fund, two hedge funds and a whole cast of former CEOs. There is sacrifice, greed and betrayal. 18,000 workers will be losing their jobs while some vulture capitalists will be walking away with millions. Another vulture capitalist will itself have been devoured in the process.

The simple fact is that the financialization of the US has led to a total disrespect for workers and workers' rights. Workers have been turned into serfs, their jobs turned into playthings for the rich with unlimited capital at their disposal. And we're all supposed to accept this because this is the inevitable outcome of capitalism. Well, not so fast there. Other countries practice a variant of capitalism (jee whiz, you mean there's more than one?) that does not exploit workers, but instead creates meaningful jobs for workers. Well, let's see what could those countries be? Well certainly, some of the European countries look out for their workers, Germany, for example. Unions are strong and workers sit on corporate boards, have a say in the running of the company.

No, it is the American variant of capitalism, not capitalism itself, that has run amok. American capitalism is destroying jobs; it has already destroyed most of the unions which were the countervailing force to the narcissistic and solipsistic demands of the capital markets.

The New York Times wrote:

Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry, according to a joint study that The Times conducted with Equilar, a board and executive data provider. The study covered thousands of publicly traded companies; privately held corporations do not report such data.

On average, the heads of private equity firms earn about 10 times as much as the heads of banks. Take Stephen Schwarzman of the Blackstone Group for example. Last year he earned $799,838,742. Then in second place was Leon Black of Apollo Global Management. He earned $799,838,742. Part of his earnings, no doubt, came from his sale of Hostess Twinkies.

And then there is Mitt Romney, a Presidential candidate no less, who exploited workers with his company Bain Capital. Rolling Stone reported (Greed and Debt: The True Story of Mitt Romney and Bain Capital): "How the GOP presidential candidate and his private equity firm staged an epic wealth grab, destroyed jobs – and stuck others with the bill"

And this is where we get to the hypocrisy at the heart of Mitt Romney. Everyone knows that he is fantastically rich, having scored great success, the legend goes, as a “turnaround specialist,” a shrewd financial operator who revived moribund companies as a high-priced consultant for a storied Wall Street private equity firm. But what most voters don’t know is the way Mitt Romney actually made his fortune: by borrowing vast sums of money that other people were forced to pay back. This is the plain, stark reality that has somehow eluded America’s top political journalists for two consecutive presidential campaigns: Mitt Romney is one of the greatest and most irresponsible debt creators of all time. In the past few decades, in fact, Romney has piled more debt onto more unsuspecting companies, written more gigantic checks that other people have to cover, than perhaps all but a handful of people on planet Earth.

By making debt the centerpiece of his campaign, Romney was making a calculated bluff of historic dimensions – placing a massive all-in bet on the rank incompetence of the American press corps. The result has been a brilliant comedy: A man makes a $250 million fortune loading up companies with debt and then extracting million-dollar fees from those same companies, in exchange for the generous service of telling them who needs to be fired in order to finance the debt payments he saddled them with in the first place. That same man then runs for president riding an image of children roasting on flames of debt, choosing as his running mate perhaps the only politician in America more pompous and self-righteous on the subject of the evils of borrowed money than the candidate himself. If Romney pulls off this whopper, you’ll have to tip your hat to him: No one in history has ever successfully run for president riding this big of a lie. It’s almost enough to make you think he really is qualified for the White House.

But the sheer incompetence of the press corps is nothing compared with the total ignorance of the American people when it comes to electing a President. Example #1: Donald Trump, a bloviating, pompous, bait-and-switch, snake oil salesman that the American people elected instead of a competent, experienced, somewhat boring diplomat. So maybe the American people deserve what they get. The Republicans certainly think so. If they can lie their way into positions of power and delude the American people as to their true motives, well, in their mind, that proves that they really do deserve all the riches they can accumulate by any means necessary. Elizabeth Warren to the rescue?

Off the Top of My Head

The American Economy is Not That Great Except for the Rich

by John Lawrence, July 17, 2018

Thanks to the financialization of the economy, rising GDP doesn't mean that more money is going into workers' pockets. When a private equity fund strips a company and sells off the parts, GDP goes up because that economic activity is added into GDP. In 2012,Hostess Products, the makers of Twinkies, filed for bankruptcy under the private equity firm Ripplewood Holdings, and some 8000 workers lost their jobs. Hostess has bounced back and forth among multiple private equity companies with the result that executives of those companies have gotten rich and workers have lost their jobs. In every case the shenanigans of private equity firms and hedge funds have caused GDP to rise, but the only financial gains have gone to the very rich and not to the average worker. Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry.

The Fed's policy of holding interest rates at zero has caused massive inflation in the real estate and stock markets, but this is not reported as inflation due to the way inflation is computed. Here too this rapid increase in home prices has made the GDP increase while pricing many average people out of the real estate market. Advantage: the rich. Disadvantage: everybody else. The American economy which seems to be in good shape with its various economic indicators like GDP, has mainly benefited the rich while seemingly benefiting everyone. But while economic indicators are all positive, the results are a further divide between the rich and the poor with the rich reaping all the gains of an economy in which the gains and increases go mainly to them.

Medium reported:

Adjusted for inflation, the US economy has more than doubled in real terms since 1975.

How much of that growth has gone to the average person? According to many economists, the answer is none or close to none.

In a recent gloomy study of the American economy, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman find that between 1980 and today, almost none of the gains from economic growth accrued to the bottom half of the population. They write, “Looking first at income before taxes and transfers, income stagnated for bottom 50% earners: for this group, average pre-tax income was $16,000 in 1980 — expressed in 2014 dollars, using the national income deflator — and still is $16,200 in 2014.”¹ Piketty, Saez, and Zucman also found that incomes of the top 1% tripled over the same time period.

New York Times columnist David Leonhardt, reacting to this work, concluded “the very affluent, and only the very affluent, have received significant raises in recent decades.”

So the world's largest economy is essentially a bifurcated economy with the rich racking up phenomenal gains while the poor and middle class stagnate. However, some in the middle class are still doing OK. They are mainly the ones who bought stocks and real estate 20 or more years ago. Those stocks and real estate have inflated due to the Fed's interest rate policies. The other middle class group that has prospered are those who have benefited from a transfer of wealth from the previous generation. Those who have inherited neither stocks nor real estate and have had to start from zero are in the worst shape because they are likely to be the ones that have acquired student loan debt to get an education that purportedly would gain them a toe hold in the middle class. But that toe hold has slipped and they have ended up with no real estate (they can't afford a mortgage because of the student loan debt they have to pay off) nor have they been able to acquire stocks at greatly inflated prices.

The intergenerational transfer of wealth has exacerbated the wealth gap between white and black families. The Atlantic reported:

A forthcoming study from Meschede and Joanna Taylor, also a researcher at Brandeis, in the American Journal of Economics and Sociology, makes the point clearly. Building on a 2017 study of theirs that examined wealth accumulation among college graduates—as well as “intergenerational financial transfers,” like when a parent helps a recent college grad out with rent or, say, gives her $1,000 a month to spend on whatever she pleases—the two looked specifically at how family inheritances, which are usually larger and tend to come all at once, factor into building and maintaining wealth.

The two researchers focused specifically on inheritances among families where at least one parent has a college degree. They looked at families like this in order to test the notion that higher education is a great equalizer.

The differences that they found between black and white families were stark. “Among college-educated black families, about 13 percent get an inheritance of more than $10,000, as opposed to about 41 percent of white, college-educated families,” Taylor said in a release announcing the new research. More specifically, white families that receive such an inheritance receive, on average, more than $150,000 from the previous generation, whereas that figure is less than $40,000 for black families.

So far from being an equalizer between black and white families, a college education has only indebted black families on average even more. In other words they are worse off with a college education than they would have been without one. A college education for many blacks and poor whites has only been a debt trap, a debt trap that follows them to retirement where their social security is snatched away from them for repayment of their student loan debt.

So Donald Trump will probably fool a lot of voters who will be sold the bill of goods that the economy is doing great. They will wonder why that is not so for them, but will have to chalk it up to their own failings. Meanwhile, Bernie Sanders, Elizabeth Warren and others will have to try and explain a more nuanced picture - that the economy is doing very well for the rich but not for those at the lower end of the economic spectrum. Again people will probably not have the mental aptitude to grasp that distinction and will probably vote against their own interests.

Off the Top of My Head

The American Dream of Owning Your Own Home is Fast Fading

by John Lawrence, April 26, 2019

Single family homes are being bought up by hedge funds while young people entering the housing market have too much in student loan and credit card debt to afford to buy one. So they are in the position of renting from a hedge fund most of which are ruthlessly and relentlessly raising rents through the roof. Few if any college graduates these days will ever own their own homes unless they go into the FIRE sector of the economy: that's finance, insurance or real estate. The financialization of the economy has left little room for anyone else except celebrity athletes and movie stars to own real estate.

Sovereignman writes:

Single-family homes were one of the last bastions of investment freedom for the little guy.

Last week a huge merger was announced between Invitation Homes (owned by private equity giant Blackstone Group) and Starwood Waypoint Homes (owned by real estate giant Starwood Capital).

If the deal goes through, the combined entity would be the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.

And this is only the latest merger in an ongoing trend.

Three years ago, for example, American Homes 4 Rent bought Beazer Pre-Owned Rental Homes, creating another enormous player. A few months later, Starwood Waypoint bought Colony American Homes.

And of course, Blackstone was one of the first institutional investors to start buying distressed homes, forking over around $10 billion on houses since the Great Financial Crisis.

At one point, Blackstone was reportedly spending $150 million a week on houses.

So is it any wonder that the middle class is disappearing? US Census Bureau statistics show that over the last decade there have been an increasing number of rental households and a decresing number of households which own their own homes. Sure we're approaching full employment, but most of the new jobs being created are for waitresses and bartenders. Wages are totally stagnant. They have about the same purchasing power as they did 40 years ago. Most wage gains have gone to the top tier of wage earners. Since 2000, usual weekly wages have risen 3% (in real terms) among workers in the lowest tenth of the earnings distribution and 4.3% among the lowest quarter. But among people in the top tenth of the distribution, real wages have risen a cumulative 15.7%, to $2,112 a week – nearly five times the usual weekly earnings of the bottom tenth ($426).

So it's clear what's happening. Foreclosed on homes and distressed properties are being scooped up by the likes of Blackstone Group. Or in other words - Wall Street. The very financial firms that caused the 2008 financial crisis which caused many people to lose their homes to foreclosure are now buying up those homes and turning them into rental properties. Then they raise the rent. Home prices and rental prices are increasing by the day. Those lucky enough to own their own homes are prospering. Everyone else is faced with the situation of paying higher and higher rents. The money being poured into the economy by the Federal Reserve, which goes mostly to the rich like those operating hedge funds, raises asset prices across the board. This does not help the average wage earner who is having his rent go up or is trying to buy his first home.

Off the Top of My Head

Fiat Money in the US and China

by John Lawrence, July 28, 2018

Most people are amazed to find out that, when a bank loans you money, it creates it out of thin air. It is not backed by gold or anything else. Nixon took us off the gold standard in 1971. Before that people could cash in US dollars for an equivalent amount of gold. Money not backed by anything is called fiat money. It is created by private banks in the US when they loan you money. In China the government creates the fiat money. A new wrinkle was added during the 2008 financial crisis. Money was also created by the US' central bank, the Federal Reserve which is privately not publicly owned. That money was given to the big banks to keep them solvent. It did not trickle down to the average citizen.

China uses fiat money to keep its workers employed. In addition to activities within China, they are building infrastructure in other countries recreating the Silk Road which was a trade route that connected the Eurasian land mass. It is called the Belt and Road initiative. Since the US government has no mechanism to create fiat money(despite the fact that Abraham Lincoln did it during the Civil War with the introduction of greenbacks), the only fiat money being created in the US goes to big banks and through them to hedge funds which have connections with the big banks.

Fiat money in the US fuels the class division between the 1% and the 99% because it is only made available to Wall Street which actually owns the Fed. In China fiat money not only keeps its workers employed, they are employed doing something constructive - building infrastructure. The only way the US could build much needed infrastructure in the US is  for the Treasury to issue more bonds which would only add to the national debt. If there were a true government owned central bank in the US, it could create money to build infrastructure thus creating jobs without the US government going into debt.

China just might have a better way to create fiat money and use it for a constructive purpose. The US fiat money goes mainly to hedge funds which use it to destroy businesses as was the case with the recent Toys R US and Hostess fiascoes. Instead of using fiat money to create jobs, in the US jobs are destroyed when a hedge fund takes a business bankrupt after loading it with debt, extracting money in management fees and shutting it down when it collapses under the weight of all that debt. Employees lose their jobs with no severance pay as was the case with Toys R Us.

China is using fiat money to build the economies of China and other nations from the ground up keeping its workers gainfully employed at the same time. The US is letting its infrastructure and its work force wither while making banks and bank connected hedge funds rich.

Off the Top of My Head

Toys R Us Latest Victim of Private Equity Funds. That's Capitalism, Baby!

by John Lawrence, July 20, 2018

Following in the footsteps of Hostess Twinkies, Toys R Us is Toast in the US, but not in Canada. Here's how the scan operates. Some rich guys get together and start a hedge find or private equity fund - same thing. They used to be called Leveraged Buyout Funds. These guys then take over a publicly traded company by buying up all the shares using the company they're buying out as collateral. So they borrow tons of money to buy the shares, and if anything goes wrong, the company (not them) goes bankrupt. After they gain control of the company, they finegle every way they can to load more debt onto that company paying themselves handsomely with the borrowed money for management fees. Finally, the company under the weight of all that debt, can't make the payments any more and goes bankrupt and out of business.

This is exactly what happened to Toys R Us and many companies before them. Some rich guys walk off with millions and the employees get screwed losing their jobs with no severance pay. Only in Canada some rich guy put up the money to keep the stores there in business. This is the kind of financial engineering that has become the hallmark of 21st century capitalism. Of course Toys R Us was also under pressure from Amazon prime which has taken over the business of most brick and mortar stores. With husband and wife both working and deeply in debt to pay a mortgage and two car payments, nobody has time to shop any more except online.

The New York Times reported:

For over a decade, Toys “R” Us had been drowning in $5 billion of debt, which its private equity backers had saddled it with. With debt payments siphoning off cash every year, Toys “R” Us could not properly invest in its worn-out suburban stores or outdated website. Sales plummeted, as Amazon captured more children’s desires — and their parents’ wallets — for Star Wars Legos and Paw Patrol recycling trucks.

Toys “R” Us is the latest failure of financial engineering, albeit one that could portend a potentially more ominous outlook for private equity in the digital era.

30,000 Toys R Us employees will get nothing but a pink slip while the fat cats will make big money just for shutting down operations.

Here's what racked said:

Those who won’t take home any of the money made from these going-out-of-business sales are the very people running it: More than 30,000 Toys R Us workers are helping the brand through its liquidation process, and on top of not having a job once Toys R Us shutters for good, they also won’t receive any severance. These workers are now rallying for the failed toy company to pay them severance in a petition that already has more than 50,000 signatures.

“In the next few weeks, over 30,000 Toys R Us workers will be out of a job with no severance,” Colleen Kleven, a Toys R Us worker who created the petition writes. “Private equity funds and corporate executives shouldn’t profit by bankrupting a company and throwing people out of work. There are more than 1 million retail workers at private equity-owned retailers in the United States. This corporate greed is hurting me and my family — and it’s unacceptable.”

All I can say is: that's capitalism, baby. You want a different system? It's up to the people to create it. As capitalism comes to dominate the world's economy, financial engineering is hot all over the world . Private equity is taking over all small publicly traded retail companies, milking them first and then taking them bankrupt. That's capitalism, baby!

Vulture Hedge-Fund Capitalism Still Devouring U.S. Jobs. Will We Ever Do Something?

Published on Thursday, March 22, 2018 by philly.com

In a perfect world, our politicians in Washington would rein in the abuses of vulture capitalism.

by Will Bunch

 

5 Comments

Toys R Us’s management has told its employees that it will sell or close all of its U.S. stores.  (Photo: Mike Mozart/flickr/cc)

It was either Mark Twain or Rod Stewart who once said that every picture tells a story … don’t it? But while a picture is still worth 1,000 words and all that other good stuff, sometimes that actual story isn’t exactly what we think it is. Consider a photograph of young Denver Post journalist Elizabeth Hernandez, sobbing on a colleague’s shoulder, that went viral after she and her colleagues were told that 30 people on their already emaciated news staff will be losing their jobs in the coming weeks — the latest blow to the ever-shrinking American newspaper industry.

Hi, @rgay. I'm the journalist crying in this @washingtonpost column (https://t.co/OrjTojqDCk ) on cuts to the @denverpost newsroom by a greedy hedgefund trying to destroy newspapers. Know anyone who likes democracy and has the means to buy us from our owner?

— Elizabeth Hernandez (@ehernandez) March 17, 2018

I know, I know … you’ve heard this story a million times as the agony known as the 21st century has unfolded. The internet is killing American journalism. No one reads newspapers anymore, and there’s no real way for anyone to make money from the nano-pennies earned from every online click (unless you’re a massive vampire squid like Facebook or Google), and so the money to pay young and once enthusiastic journalists like 25-year-old Elizabeth Hernandez just isn’t there. Too bad.

The only problem is that this is not the real story of why Hernandez — No. 1 on the layoff list since she was just hired back at the Post three weeks ago, by editors who had no clue that a financial neutron bomb was about to go off — and her colleagues wept. While the bigger problems of modern journalism are as true in Denver as everywhere else, the real problem at the Post is the shady financial shenanigans of the vulture capitalists who bought the paper’s parent a few years back, stripped it down like a Pittsburgh steel mill, and left a major American city with a tiny Alamo-like band of journalists surviving to report on its civic life and keep an eye on its politicians.

Off the Top of My Head

Why Can't Government Contribute to Charity

by John Lawrence

Are you overwhelmed by all the charitable requests you get at every store you shop at? I am. And all the email requests for contributions to good causes. And all the TV requests, the Go Fund Me, crowdfunding and fundraising websites. I'm sure these are all good causes, and if they are, why isn't the government contributing to them? I'm not even sure that, when they ask you for a contribution at Petco, the Petco corporate headquarters are contributing.

President Donald Trump said to Puerto Ricans that the Federal government was not going to help them that much. He as much as said, "Get off your lazy asses and help yourselves." And this after Puerto Rico has been devastated beyond belief. “Puerto Rico survived the Hurricanes, now a financial crisis looms largely of their own making. A total lack of accountability say the Governor. Electric and all infrastructure was disaster before hurricanes. Congress to decide how much to spend. We cannot keep FEMA, the Military & the First Responders, who have been amazing (under the most difficult circumstances) in P.R. forever!," he tweeted.

For right wingers, including Trump, they don't see charity as a government function. They think charity should be undertaken privately. The only government function they consider legitimate is fighting wars. If they had their way there would be no FEMA, no disaster relief. They have expressed this in an action-speaks-louder-than-words statement by underfunding FEMA and any other government operation that actually helps people like, for instance, the Peace Corps and AmeriCorps.

So all the requests to average citizens to contribute to this or that cause play right into the Republican right wing philosophy that charity is not a government or public function. It should be undertaken privately on a voluntary basis. Don't ask your grocery or drug store if their CEO is matching your contribution when they ask you for a donation on that little machine you stick your credit card in.

Perhaps we should rethink whether or not the billions of dollars needed for emergency assistance from natural disasters like hurricanes, fires and earthquakes should be provided by the government or on a voluntary basis by we citizens. Trump has fired a shot over the bow of Puerto Rico. My advice to Puerto Ricans is to get out while the getting's good.Otherwise, the hedge fund vultures will be coming for what little money you have left. They've made the bet that they will get a good return on your $80 billion government debt. They don't care that you have been devastated by a hurricane. They want their money.  Austerity looms both from the hurricane's devastation and from the vulture hedge funds as well.

Off the Top of My Head

Puerto Ricans Will Be Fleeing the Island in Droves

by John Lawrence

It's not just the fact that Puerto Rico has been devastated by Hurricane Maria. Even before the hurricane made any semblance of human civilization a thing of the past, Puerto Rico was mired in a debt crisis. Now the hurricane has left the people of Puerto Rico facing a double whammy.

The LA Times reported: "Two weeks after the storm devastated Puerto Rico, tens of thousands of hurricane evacuees are packing scheduled flights and charter jets in what officials there and in states across the U.S. fear is the beginning of a mass exodus of historic proportions. The mainland had already been absorbing record numbers of Puerto Ricans fleeing economic decline and a mounting debt crisis, with more than 700,000 migrating between 2006 and 2015."

Any Puerto Rican with half a brain in their head will take any means of transportation possible and head for the mainland. After all they are American citizens, and they need no visa or passport. They are essentially refugees with a ticket to the Promised Land unlike refugees from the Middle East, Africa and Asia.

Puerto Rico's government is more than $70 billion in debt plus $50 billion in pension obligations. People staying on the island would be stuck with it just like the Greeks were. Problem for the Greeks was that they were not American citizens so could not get out of paying the debt by leaving Greece. They were subjected to austerity.

Puerto Rico partied hearty, but now the party's over. It's time to call it a day. Or is it? Puerto Ricans can get out of paying the debt simply by moving to Orlando. The poor suckers left behind will have to deal with it.

Hedge funds own a lot of the debt, and they will probably be hung out to dry because they aren't going to get paid back by the few Puerto Ricans left on the island.They are on the hook for billions in Puerto Rican debt. Ha. Ha.

For instance, Autonomy Capital, a New York hedge fund run by former Lehman Brothers banker Robert Gibbins, owns nearly $1 billion of Puerto Rican general obligation bonds. FCO Advisors, a hedge fund run by former Goldman Sachs municipal banker Hector Negroni, is sitting on more than $400 million of Puerto Rican bonds as well. Another key player is Aurelius Capital Management, a New York hedge fund that lists nearly $500 million in Puerto Rican bonds. Aurelius, run by Mark Brodsky, won big by playing hardball with Argentina for years following that country's default.

The typical scenario where the hedge funds will subject their debtors to the harsh conditions of austerity will force Puerto Ricans to say, "Naa, who needs it?", and the hedge funds will be left holding the bag.

Off the Top of My Head

Screwy Capitalism: When a Hedge Fund Runs a Profitable Company into Bankruptcy

by John Lawrence

Hedge funds are leveraged buyout artists. They borrow huge sums of money in order to buy up all the outstanding stock of some company. Then they make that company, not the hedge fund, responsible for repaying the debt. In many cases they can't do it and so go bankrupt. Meanwhile, the hedge fund managers have paid themselves handsomely out of the borrowed money which again is money owed to Wall Street banks by the company not the hedge fund managers. Another name for hedge funds is private equity funds. The game is the same. Borrow in such a way that the borrowers are not responsible for the debt. This is not what capitalism is all about, but is what it's morphed into.

Instead of investors taking risk, the useful work of private equity, they make risk for others, what John MacIntosh called its malevolent doppelganger. After stripping the company of any asset that can be stuffed into the pockets of the hedge fund or private equity managers, the risk associated with the weakened company is largely borne by its employees, suppliers and customers who get little (if anything) in return.

This is exactly what happened to Toys R Us recently. The Toys "R" Us debacle began in 2005 when private equity firms bought the company for $7.5 billion. Over the last 12 years, this original "take private" deal has probably sucked more than $5 billion out of the company: $470 million in "advisory" fees and interest to the private equity firms and $4.8 billion ($400 million per year for 12 years) in interest on the acquisition debt plus the tens of millions of dollars in legal fees Toys "R" Us will spend in bankruptcy. (It's ironic that the investors who bankrupted the company won't be paying any of these fees.) Yet despite a tough retail environment, Toys "R" Us actually made $460 million from selling toys in 2016 but that didn't help much since all of it -- 100% -- went to pay interest on the debt.

The media portrays the Toys R Us bankruptcy as the plight of brick and mortar stores being handed their lunch by online retailers such as Amazon. Nothing could be further from the truth. The bankruptcy had to do with a transfer of money from the 99% such as the employees and suppliers to the 1%, the bankers, lawyers and financiers. Since all the interest paid was tax deductable, taxpayers also got screwed.

The extreme perversity of this situation is that the borrowers of money are not on the hook to pay it back. If you borrow money to buy a car or a house, you are on the hook. Not so when the borrowed money is used to buy a company. The limited liability corporate structure developed in the mid-19th century as a "corporate veil" to encourage investors to put money into companies is what allows investors to take money out without being on the hook. This law can and should be changed so that hedge and private equity funds cannot bankrupt companies, load them with debt, screw the employees, make them take less in wages, destroy their unions and raid the pension funds. A country that allows this to happen is intent on increasing the economic divide between rich and poor.

These leveraged buyout artists are nothing but parasites preying on and destroying companies for their own profits. They do nothing constructive in the process!

A sane economic system would not let this happen. You can have a system which encourages entrepreneurship and economic growth without the perverse economic ramifications of American capitalism.

Off the Top of My Head

Toys R Us Bankruptcy Caused by Hedge Fun Leveraged Buyout

by John Lawrence

It's the same old game plan for private equity firms Kohlberg Kravis Roberts (KKR), Vornado Realty Trust, and Bain Capital Partners. They acquired the publicly traded shares of Toys R Us in a leveraged buyout during the LBO boom in 2005 in a deal valued at $6.6 billion. They funded the acquisition in large part by loading up the company with debt — hence “leveraged buyout.” Remember Mitt Romney and Bain Capital?

First the PE firm borrows the money to buy out the publicly traded shares. Then they load the company - in this case - Toys R Us with the debt. Get the Bait and Switch going on here? The PE firms borrow the money, but they are not the ones that have to pay it back. It's the company they take over that's turned into the debtor. The PE firms pay themselves handsomely out of the borrowed money. The only losers here are the employees of Toys R Us.

Wolfstreet.com reported:

So here’s what the three PE firms did to Toys R Us: they stripped out cash and loaded the company up with debt. And these are the results: At the end of its fiscal year 2004, the last full year before the buyout, Toys R Us had $2.2 billion in cash, cash equivalents, and short-term investments. By Q1 2017, this had collapsed to just $301 million. Over the same period, long-term debt has surged 126%, from $2.3 billion to $5.2 billion.

This table shows the astounding results of asset stripping and overleveraging. It takes a lot of expertise and Wall Street connivance to pull this off. So whatever happens to Toys R Us, the PE firms already extracted their wild profits:

So what if then Toys R Us goes under. The PE executives already have their money. That's what a "leveraged buyout" is all about. This is exactly the same thing that happened to Hostess brands, the makers of Twinkies. Check out my article, "How Twinkies Made a Few Billionaires Richer While Thousands Lost Jobs" I wrote in February of this year. 18,000 Hostess workers lost their jobs in that LBO. The pension fund was stripped. Here's what I said:

Twinkies have been around since the 1920s. They are as American as, well, apple pie. But Twinkies parent company, Hostess, was more akin to a pinata for the rich and their penchant for financial engineering. Hostess had been bought and sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger. Then the company filed for bankruptcy in 2004. After it emerged from the longest bankruptcy in history in 2009, it had changed its name to Hostess Brands and a private equity group, Ripplewood Holdings, had taken control of the company with a 50% equity stake. There were also loans and lines of credit from hedge funds, Silver Point Capital and Monarch Alternative Capital. Hostess Brands’ union workers agreed to pay cuts and made contract concessions in exchange for equity.

The same thing that happened with Twinkies is happening to Toys R Us. The last part of the game plan didn't work however. The attempt to take Toys R Us public which would have netted the PE firms even more money failed. Investor money was not going to flow in enriching KKR, Vornado and Bain even more leaving the "public" with a turkey on its hands that would eventually go bankrupt anyway. Instead TRU went bankrupt on the PE firms' watch and now will be "restructured' which is another name for screwing the employees in order to enrich PE firms. Capitalism sucks!

And you know what? There was not a mention of the role of PE firms in the Toys R Us bankruptcy in the discussion on the NBC evening news last night. The mainstream media don't want you to know about the dirty little secrets of capitalism or global warming.

How Twinkies Made a Few Billionaires Richer While Thousands Lost Jobs

by John Lawrence from the San Diego Free Press

Twinkies: The Junk Food That Is an American Tradition

Remember when Twinkies went out of business and people mourned the loss of such a time honored treat? How could such a sorry state come to pass? Weren't Twinkies profitable any more? Were people consuming less of them because they were mostly sugar and not good for you? Wrong and Wrong. As it turns out, it was all about some hedge fund shananigans designed to make the wealthy even wealthier while sacrificing the jobs and pensions of loyal workers. It's called financial engineering, and it creates profits by destroying jobs.

As I wrote way back in 2012 in a San Diego Free Press Article, Twinkies’ Twisted Tale: Junk Food Devoured By Junk Bonds:

All the late night talk shows laughed it up over the supposed demise of Twinkies, Ho Hos, Ding Dongs, Wonder Bread etc as the news came out that Hostess Brands was going bankrupt. But delve beneath the surface and you will find something more akin to a Shakespearean tragedy than talk show banter.

It’s a tale involving two unions, one private equity fund, two hedge funds and a whole cast of former CEOs. There is sacrifice, greed and betrayal. 18,000 workers will be losing their jobs while some vulture capitalists will be walking away with millions. Another vulture capitalist will itself have been devoured in the process.

Twinkies have been around since the 1920s. They are as American as, well, apple pie. But Twinkies parent company, Hostess, was more akin to a pinata for the rich and their penchant for financial engineering. Hostess had been bought and sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger. Then the company filed for bankruptcy in 2004. After it emerged from the longest bankruptcy in history in 2009, it had changed its name to Hostess Brands and a private equity group, Ripplewood Holdings, had taken control of the company with a 50% equity stake. There were also loans and lines of credit from hedge funds, Silver Point Capital and Monarch Alternative Capital. Hostess Brands’ union workers agreed to pay cuts and made contract concessions in exchange for equity.

First Load Company With Debt. Then Declare Bankruptcy.

Bringing the saga of Twinkies up to date, on January 10, 2012, Hostess Brands filed for Chapter 11 bankruptcy for the second time, but management said that it would continue to operate with $75 million debtor-in-possession financing from Monarch Alternative Capital, Silver Point Capital and other investors. The company stopped paying future pension benefits after August, thereby breaking its union contracts.

After that Apollo Global Management and Metropoulos & Company  spent $186 million in cash to buy some of Hostess’s snack cake bakeries and brands in early 2013. Less than four years later, they sold the company in a deal that valued Hostess at $2.3 billion. Apollo and Metropoulos have now reaped a return totaling 13 times their original cash investment. Along the way some 18,000 unionized workers lost their jobs and their pensions.

The New York Times wrote:

Deals like Hostess have helped make the men running the six largest publicly traded private equity firms collectively the highest-earning executives of any major American industry, according to a joint study that The Times conducted with Equilar, a board and executive data provider. The study covered thousands of publicly traded companies; privately held corporations do not report such data.

On average, the heads of private equity firms earn about 10 times as much as the heads of banks. Take Stephen Schwarzman of the Blackstone Group for example. Last year he earned $799,838,742. Then in second place was Leon Black of Apollo Global Management. He earned $799,838,742. Part of his earnings, no doubt, came from his sale of Hostess Twinkies.

The New York Times noted:

Private equity firms note that much of their top executives’ wealth stems from owning their own stock and that they have earned their fortunes bringing companies back to life by applying their operational and financial expertise. Hostess, a defunct snack brand that was quickly returned to profitability, is a textbook example of the success of this approach.

Hostess Made Profitable Again by Laying Off Workers

Yes, Hostess was returned to profitability by laying off 18,000 workers, destroying their union and raiding their pension fund - all so a few billionaires could lick their sumptuous chops over the killing they made in the billions of dollars. Workers lives destroyed equal billionaire private equity fund operators' (also known as leveraged buyout artists) profits. The LBO artists buy a company and then load it up with debt. The purpose of the debt is not to produce more or better product, build more plants or hire more workers. The purpose of the debt is solely so the new owners can have a fabulous payout.

In American capitalism it's only the brand names that have any value anyway. Manufacturing is passe. Manufacturing can be contracted out to the cheapest non-union or automated provider. The owners of the brand names make most of the profits. Politicians pull much the same thing when they want to privatize a public asset. They load the asset up with debt, and then complain that because it's government owned, it can't operate efficiently and needs to be privatized. Once privatized it becomes subject to financial engineering and is tossed around like a hot potato with hedge fund executives and private equity executives making money after every toss. The usual victims are the workers, unions and pension funds, not to mention consumers. Employer provided health insurance also goes by the board.

Donald Trump is making a big deal out of cajoling companies to keep jobs in the US. GM is investing billions of dollars right here. However, most of the big corporations' investments in the US are in robots. It seems that they are even cheaper than Chinese or Mexican workers because they never get sick, never miss a day of work, and don't require a union or a pension. So bringing manufacturing back to the US is the latest trend. It doesn't mean, however, that jobs are coming back to the US. It does mean that automation and robots in the US make it more cost effective to manufacture here.

The Sweetest Comeback Ever

Fans gathered on Rockefeller Plaza in New York City as Al Roker of the "Today" show drove up in a delivery truck with a load full of Twinkies. He was going to give Americans what they wanted: Twinkies. As the crowd roared and cheered, the Twinkies flew through the air to the assembled throng. One woman stuffed them down her dress; another man crammed them into his mouth. It was the summer of 2013 and, as Twinkies came back on the market, there was a feeding frenzy. The return of Twinkies was billed on the "Today" show as the sweetest comeback ever. However it was not so sweet for the 18,000 workers who had lost their jobs and their pensions due to the financial engineering of Apollo Global Management and Metropoulos & Company. For them, considering the billions of dollars they reaped, it was a veritable sweet comeback indeed.

As a postscript we found this: Apollo Global Management, the $186 billion private equity firm co-founded by billionaire Leon Black, has agreed to pay $52.7 million to resolve Securities & Exchange Commission charges that its private equity funds misled investors about fees.

Puerto Rico is the Next Greece

by John Lawrence

It's the Same Old MO: Entice With Money, Then Foreclose

It's deja vu all over again as Yogi Berra would say. Another country that went down the road of debt accumulation just to pay for essential public services. Since Puerto Ricans are born American citizens, you'd think that Puerto Rico could just declare bankruptcy as Detroit, Birmingham and San Bernardino did. But no, US law forbids that. On May 2, a bond payment of $422 million was missed, and a $2 billion payment comes due in July. There's no way Puerto Rico can pay. Puerto Rico is begging Congress for debt relief. But no debt relief is in sight. Here are the facts: Puerto Rico is $70 billion in debt. 45% of the people live in poverty. The unemployment rate is over 12%.

Think Progress said:

Hedge Funds Helped Wreck Puerto Rico’s Economy, And The Poor Are Paying The Price

Angry graffiti scrawled across the brightly colored buildings of San Juan tells the creditors of the world exactly where they can stick their plan to extract roughly $73 billion in debt from the struggling U.S. territory. “Puerto Rico comes first. To hell with the debt,” reads one wall. “Don’t play around with my retirement,” says the side of a major freeway. Down by the University of Puerto Rico, the walls and sidewalk are filled with laments — “Look into my unemployed face” — and calls to action: “Study and fight!”

Depending who you ask in Puerto Rico, the debt crisis was caused by neo-colonial and imperialist policies from the U.S., the Puerto Rican government’s wasteful overspending and corruption, or the cadre of hedge funds that are currently profiting from the island’s woes. Add to that toxic mix a series of free-trade agreements that triggered mass outsourcing, and a population in rapid decline due to out-migration, and you arrive where we are today, with the government on the hook for tens of billions of dollars.

Unlike Greeks, Puerto Ricans have an out - simply pack up and leave for the United States. They're American citizens after all. And that's just what they're doing - in droves. Doctors are leaving at the rate of one per day. Meanwhile, vulture hedge funds are buying up Puerto Rican debt at fire sale prices. Like Paul Singer did in Argentina, they will then demand repayment at full face value.

Meanwhile, unemployment skyrockets and and almost half of the remaining islanders are living in poverty. How did it get this way? As usual the US Congress and tax policy are at fault. As a result of a 1976 tax reform, US pharmaceutical companies enjoyed a tax holiday on Puerto Rican corporate income and paid virtually no property taxes. Under this law, U.S. companies also received 100% exemption from municipal taxes in Puerto Rico, and pharmaceutical companies qualified for a special 5% payroll deduction. Corporations which located in Puerto Rico didn't have to pay taxes to repatriate their profits as they do when profits are made in other countries.

Congress Made Puerto Rico an Offer It Couldn't Refuse, Then Reneged

With the help of US tax incentives the pharmaceutical industry accounted for as much as a quarter of the island's gross domestic product with $36.5 billion in annual exports in 2007.

However, according to Bloomberg:

By the mid 1990s, critics led by Texas Representative Bill Archer, then the Republican chairman of the House Ways and Means Committee, attacked the break as too expensive, costing the U.S. about $3 billion a year. In some industries, the tax subsidy was costing the U.S. as much as $72,000 per job, according to a study by the federal agency now called the Government Accountability Office. After a lobbying battle in 1996, the tax break was repealed, with a 10-year transition period for companies already benefiting from the credit.

After making tax policy such that many businesses, especially pharmaceutical firms were attracted to the island, tax policy was reversed and they all moved out. In 1996 a section of the US Internal Revenue Code (Section 936), that provided for profits to be repatriated to the US without paying federal taxes, was repealed. Thus the employment base had its legs cut out from under it. So to keep public services comparable to what they had become accustomed to, the government started to borrow money from Wall Street. Predatory loan sharks that they are, they started making loans to Puerto Rico that they knew they couldn't pay back just like they made mortgage loans prior to the US financial crisis of 2008 that they knew the mortgagees couldn't pay back - liar loans they were called because people taking them out didn't have to show any income. They could say their income was anything with absolutely no bank statements or other paperwork to back it up.

This whole scenario is known as debt deflation that we have written about before. No matter how much money is infused into Puerto Rico to enable it to meet payment deadlines on its bonds, there will never be enough money to pay back its loans because the money is just not there even to meet current expenses. They are insolvent. Throwing good money after bad turns borrowing more into a Ponzi scheme. The only ones who can possibly benefit from this are the hedge funds which will demand that government assets should be privatized and sold off to them in lieu of repayments on the bonds they hold. This is exactly what happened in Greece and Argentina and in Detroit for that matter. Hedge funds said that, if Greece could not repay them when the bonds became due, they would take Greek assets such as the Parthenon and Athens ports and whatever else was a moneymaker.

What happened in Detroit was Disaster Capitalism at its most exemplary. An Emergency Manager was appointed to run the government thus taking "democracy" out of the hands of elected representatives. The same thing will probably happen in Puerto Rico after it's declared insolvent by the bond markets which are all in a dither and all atwitter over Puerto Rico's impending bankruptcy. Oh I forgot, Puerto Rico is not allowed to go bankrupt; that makes the situation even worse. Valuable assets will then just be extracted as Puerto Ricans either exit the island or fall on their knees and beg the bond markets for mercy.

The hedge funds may have more success in this strategy of asset seizing in Puerto Rico than they had in Greece because Puerto Rico is at the mercy of US lawmakers. Greece was not. The US Congress can just turn over Puerto Rican assets to rich investors, and they will take the good parts while leaving the rest to rot including the people who will not have the capability of reaching the mainland - the 45% in poverty.

Bond Markets Structure Who Gets Paid First and Who Waits in Line

The bond markets are wising up though. The all important structuring of who gets paid first and who has to stand in line is being given more attention these days. Before the predatory loan making process proceeds, the recipient has to agree that bond holders will be paid back first even before essential services are provided. Puerto Rico is safe for now because the payments that are due immediately don't have this provision so the government of Puerto Rico can and has made the decision to use what meager funds are at its disposal to pay for essential services and tell the bond holders to take a hike. That will not always be the case especially for future non-heeders of this cautionary tale. In the future bonds are structured in such a way that they must be paid back even before essential public services such as drinking water and hospitals can be paid for. This is from the New York Times:

But the bigger issue may be that second, larger debt bill due in July, roughly $800 million of which is constitutionally guaranteed, giving the payment of it legal priority even over the funding of essential public services, such as police patrols, ambulances or drinking water. Investors who hold the guaranteed debt say they are prepared to fight to enforce their legal rights, no matter how much it may shock and anger the island’s residents.

The cycle leading to the private accumulation of wealth by billionaire hedge fund owners has now become a well worn path: predatory lending followed by insolvency of the debt, followed by the installation of a non-democratically elected Emergency Manager, followed by privatization of assets followed by the destruction of public services followed by the destruction of government itself, the proverbial drowning in the bathtub. Thus all Puerto Ricans will have to eventually pay private corporations for drinking water, electricity, hospitals, education, roads and various other services that are now primarily supplied as public rights throughout the world. And workers will be at the mercy of no-unions-allowed private employers.

There are several wrinkles to the Puerto Rico debacle that make its situation somewhat unique. Before bondholders and hedge funds got wise and demanded that they be repaid for their bonds even before essential services could be paid for (the structuring we mentioned earlier that sets up the order in which debts are to be repaid), hundreds of millions in bonds were bought from a Government Development Bank that resold them to Puerto Rican pension funds. So a default on those bonds would mean the bondholders would actually lose their money instead of being first in line to reclaim it.

Despite the power and importance of the Government Development Bank, its debts are not backed by any taxing power or constitutional guarantee. If it defaults on the looming $422 million payment, its creditors have little legal recourse. And much of the bank’s debt, in the form of municipal bonds, is held by more than 100 credit unions on the island — financial institutions that tend to serve mom-and-pop savers in Puerto Rico’s poor and remote communities.

“The island’s credit unions represent the nest egg of nearly 1,000,000 Puerto Rican families (one of every four Puerto Ricans) that trust their livelihood and savings in these financial institutions,” said the credit unions’ primary regulator in a statement released last year, when the sector held Government Development Bank debt with a face value of slightly more than $500 million, according to regulatory records. The regulator’s spokesman did not answer messages Thursday.

Historically, the credit unions were required to invest only in very safe assets. But in 2009 their regulators made an exception, allowing them to buy and hold riskier bonds, as long as the bonds were issued by some branch of the Puerto Rican government. The change gave the Government Development Bank a new way to raise money, by selling its bonds to the credit unions.

So what else is new? It always boils down to seizing the assets of a pension fund to pay current bills or to bolster hedge fund profits. Meanwhile average Puerto Ricans (if there are any left) suffer. Financial maneuvering and shenanigans abound, the result of which is always to make the rich richer and make beggars out of the poor. This is what the financialization of the economy has wrought. Puerto Rico has already removed assets from its workers’ compensation pool and public pension system to pay bills, taken cash from low-priority bonds to make payments due on high-priority bonds, and extended a highway privatization, giving up future toll revenue (as Chicago did) in exchange for upfront payments of $115 million. So Puerto Rico is well on its way to becoming a private corporate owned haven for rich capitalists, a wholly owned subsidiary of the rich, who will profit from the booming tourist industry by building huge developments - hotels, condos and casinos which cater to the leisure travel class and the uber wealthy in this island paradise (for the rich).

Financial Parasites Have Become Neo-Feudal Landlords

by John Lawrence

Classical economics divided income into two types: earned and unearned. Earned income came from productive labor combined with capital investment. Unearned income was considered parasitical and consisted of rent, interest and dividends. It was not considered as adding to GDP but as subtracting from it. It was money made by manipulating money much as feudal landlords made their money in what has been called a rentier economy.

Today most of the money earned by the 1% which is driving the income inequality gap is made in the financialized, rentier economy but is now considered earned income. New methods have been devised to make money not by productive labor and investment but by manipulating financial instruments. One such manipulation consists of stock buybacks.

Why would a company buy back its own stock, stock that was issued in the first place supposedly to give the company money it needed for productive investment to produce goods and services. The answer is very simple. When a corporation buys its own stock (often with borrowed money), the stock usually goes up at least temporarily. That gives the executives of the company and activist hedge funds time to cash in their stock grants, options and garden variety stocks and make a killing. The boost in stock value also impresses Wall Street which cares solely about the short term financial indicators for a company and not at all about what the company did to achieve those indicators.

When a company uses its profits or even borrowed money to buy back its own stock, that's money that is not being used for research and development or to expand production or to make a better product. The money that the executives and hedge funds make is strictly because of financial manipulation, but in a financialized economy it's considered to be additive to GDP. The measurement of GDP is no longer linked wholly or even mainly to production, but now consists to a large extent of income that is made in the rentier economy.

Carl Icahn, a big investor in Apple, is always trying to get them to buy back their stock so he can cash in. The billionaire activist investor lobbied Apple to buy back billions worth of its shares to boost value to shareholders. In April 2014 Apple boosted its buyback plans by $30 billion and even split its stock for the first time in nine years. Satisfied? Never. Icahn's taking another swing at getting Apple to buy back even more stock, saying the shares could double to more than $200 apiece.

Another way the parasites make money which makes the GDP figures look good is to not pay taxes. The tax code has been completely captured by the large corporations and their lobbyists which has shifted the burden away from corporations and onto the average working person - the 99%. Both Democrats and Republicans are complicit in this arrangement, one example of which is the tax giveaway they are getting ready to implement.

William Greider in an article entitled Democrats and Republicans Are Quietly Planning a Corporate Giveaway—to the Tune of $400 Billion writes the following:

The bad news is that key leaders of the Democratic Party—including the president—are getting on board with Republicans, despite some talk about confronting income inequality. Influential Democrats intend to negotiate with Republican counterparts on the size and terms of post-facto tax “forgiveness” for America’s globalized companies. This is real money they’re talking about—a giveaway of hundreds of billions

Why haven’t voters heard about this from candidates? Because Republicans and Democrats both know it would make angry voters even angrier.

The major multinationals complain about a tax problem that most citizens would love to have for themselves: Thanks to a loophole in the tax code, the companies do not have to pay US taxes on profits they have earned in foreign countries until they bring the money home to American shores. Altogether, the globalized US companies have accumulated $2.1 trillion in untaxed profits, most of it parked in overseas tax havens.

The multinationals are waiting for Congress to forgive them their debts.

Oh, but forgive the debts of the little guy? Never!! While corporations expect to have their debts forgiven, there is no such help for for the average American or average debtor nation like Argentina or Greece.  For the rest of us the commandment is "Thou shalt PAY UP." Wall Street has adamantly stuck to this first Principal of Finance which is sancrosanct, so sancrosanct in fact that bankruptcy rules for the average American are being tightened while at the same time they are being loosened for corporations. You think student loan debtors can go bankrupt? Guess again.

After all part of the vulture capitalist's playbook is to buy a company with borrowed money, load it down with debt, strip its assets, raid its pension fund, then take it into bankruptcy in order to destroy its union. Having accomplished all that and by the way added to GDP while so doing, the company can then be taken out of bankruptcy, taken private and then taken public again in order to get another infusion of cash from an Initial Public Offering (IPO) which is immediately gobbled up by the hedge fund (another name for vulture capitalist) itself. All of these shenanigans make money off of money, do nothing for productive investment but do add to GDP.

Congress let these corporations have a "tax holiday" in 2004 on the hope and promise that these corporations would spend their largesse doing research, investing in America and creating jobs. What happened? The 15 companies that benefited the most from a 2004 tax break for the return of their overseas profits cut more than 20,000 net jobs and decreased the pace of their research spending. One of the beneficiaries was Qualcomm, a major whiner for another tax holiday. On his way out the door Paul Jacobs exhorted his employees and shareholders to “Send your Congress people your opinion that you’d like American companies to be able to bring offshore money back to the United States to either reinvest or return to shareholders.” Qualcomm had $21.6 billion in overseas profits in 2014. And those poor shareholders - most of them in the 1% - are having to make do without their money. Oh, Boo Hoo.

As a result GDP is no longer a measure of the health of an economy. If a tornado wipes out a town, the money spent to rebuild that town adds to GDP, but does not constitute a contribution to the economy that adds anything except to restore what was already there. In the same way hedge funds add nothing productive to the American economy, but they do increase GDP. So GDP as a measure of anything productive is passe. It is merely a measure of the cash that changes hands regardless if it changed hands as a result of winning a bet in a casino or in the casino of Wall Street or it changed hands because someone bought something that was actually useful.

And don't forget the second Principle of Finance - "If Wall Street fucks up, thou shalt bail us out" in which case taxpayers will restore their financial rectitude and well-being like we did in 2008. Or maybe this time it will be a bail-in in which case citizens will make Wall St whole again with money from their savings accounts which by the way are the property of the banks. The bank has merely issued you what amounts to an IOU, and, what's more, you're treated to practically zero interest rates on your savings. How's that you thrifty senior savers?

If GDP doesn't measure the exchange of productive goods and services or productive investment, why does every politician and pundit insist on "growing the economy" meaning increasing GDP? We would be better off in some ways if GDP were diminished and the emphasis was on a sustainable economy, an economy which valued the health and welfare of the average person instead of the 1%. All the money that is made from the oil and gas industries needs to diminish if we are to make any progress with global warming. All the money made by Wall Street on fees, interest and derivatives needs to diminish if the economy is to be placed on a more solid financial footing.

Consumers contribute 70% of GDP. If we start growing our own food and fixing our own cars and buying less junk, this will diminish GDP, but the average American will be better off. They would have less debt. If we stop going into debt, GDP would go down. But so would the inequality gap as corporations earned less profit and Americans took on less debt. How to make America great again? Pay down your debt, do more for yourself instead of buying goods and services in the cash economy, buy and work local and stop patronizing large corporations and Wall Street banks.

The only way that the central bank of the US, the Fed, knows to grow the economy is to lower interest rates and force more debt on American citizens. This is what monetary policy amounts to. Fiscal policy, in which the government would create jobs directly by providing money for infrastructure revitalization, is non-existant thanks to Republicans who won't approve expenditures by government that would actually create jobs and the military-industrial complex which gobbles up every available dollar.

If American citizens don't take on more debt, the economy goes to hell in a handbag. The only way around this is to start a public bank. Then the local economy can be served directly including creation of good jobs without reliance on Wall Street. By the way sports fans, the plan for the new San Diego "Convadium" would involve the City of San Diego issuing a billion dollars in bonds, a plan they are touting as requiring no taxpayer funding, but which will involve huge payments to Wall Street for fees and interest. These bonds will be backed by nothing except hotel taxes. Who's liable here if the plan goes south?

Michael Hudson writes in his book, Killing the Host - How Financial Parasites and Debt Destroy the Global Economy:

"Trying to rise into the middle class these days is a road to debt peonage. It involves taking on mortgage debt to buy a home of one's own, student loans to get the education needed to get a good job, an automobile loan to drive to work, and credit card debt just to maintain one's living standards as the debtor falls deeper and deeper into the hole. Many recent graduates find that they have to pay so much on their student loans that they must live at home with their parents and cannot afford to get married and start a family, much less qualify for a mortgage. That is why consumer spending has not risen since 2008. Even when income rises, many families find their paychecks eaten up by debt service."

Bernie Sanders is addressing the problem of debt peonage, which is gradually enslaving the American middle class, directly by calling for free public education and Medicare For All. He is also addressing the US tax code which has been rigged in favor of the wealthy and the corporations starting with Ronald Reagan's and Alan Greenspan's meddling. Republican Presidential candidates would only hasten the descent of the American middle class into debt peonage by giving further tax breaks to the rich while transferring even more of the tax burden onto the middle class and the poor.

The American dystopia that is becoming more likely is one in which a small percentage owns the means of production and rent producing assets while the vast majority eke out a living doing menial labor that can't be done by robots and automatons. Andrew F. Puzder, CEO of the parent company of Carl’s Jr., has announced he’s investing in machines because he doesn't want to pay employees $15 an hour or to pay for their health care. Puzder makes more in one day ($17,192) than one of his minimum-wage employees working full time makes in a year ($15,080), The Nation reported last year.

Work for nothing or be replaced by a robot - that's the choice for the 99%. But robots are taking middle class jobs now and will take more in the future, minimum wage or no minimum wage. So what's the solution? Start your own business, become self-employed, stay away from student loan debt or start or become a member of a cooperative enterprise. You have no future as a minimum wage employee regardless of the minimum wage. Take the bull by the horns instead of trying to convince the cow not to shit on you.

The American dystopian vision of the future is even more appalling than the feudal era in which human labor was actually needed to make the economy work. Sure the 1% controlled the wealth; it was a rentier economy but human labor was necessary. Now humans as well as their labor are expendable. The future could hold a life of abundance and leisure for everyone but that is not likely unless wealth is more evenly distributed. It won't be more evenly distributed unless consumers stop consuming, take matters into their own hands and start producing for themselves. The sad truth is you can make more money as a self-employed laborer than you can working a 40 hour week for MacDonald's even if you just do a couple of jobs per week! Why work for $10. an hour for someone else when you can make five times that much as a self-employed doing exactly the same work?

Hedge Fund Billionaire Paul Singer Makes Argentina Cry For Itself

by John Lawrence

Argentina is the latest country to suffer at the hands of US vultures. Paul Singer of the Elliott Management hedge fund will reap a huge sum based on his purchase of Argentinian bonds in 2001. His firm has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, to its knees. Hedge funds like Singer's play a big part in the financialization of the global economy, making money off of money with no productive labor involved. They are making the inequality gap between the wealthy, the 1%, and the rest of us, the 99%, even bigger. Singer's money will be deposited into the account of one of his subsidiaries in the Cayman Islands, a tax free jurisdiction, which means he will pay no US taxes on his windfall.

During the Argentine Great Depression from 1998 to 2002, Argentina took on a lot of debt from US bondholders. The economy shrank by 28 percent from 1998 to 2002. After Argentina defaulted on its bonds, Singer and others snatched them up for pennies on the dollar. Singer will get back $2.28 billion, equal to about 369% of the face value $617 million in principal, under the terms of a settlement announced February 29, 2016. However, Singer bought the bonds for pennies on the dollar and then insisted in being paid back full face value in US Courts which agreed with him. So his return on investment is more likely around 2000%.

Argentina tried to restructure or write down its debt in 2005. While most investors agreed to receive less than full face value, Singer was a holdout demanding he be paid 100 cents on the dollar for full face value for bonds he had purchased for pennies on the dollar. Most of the speculators who had purchased these bonds agreed to a 76% payout, but not Singer. He saw a chance to make a killing. By 2013 his NML affiliate in the Cayman Islands (a no tax jurisdiction) had spent about $49 million for Argentinian bonds which had a face value of perhaps $250 million.

A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, but Singer was still a holdout. Bondholders, who participated in the restructuring, accepted repayments of around 30% of face value and deferred payment terms, and began to be paid punctually. On the other hand Singer sued in New York federal court to get full face value of the bonds he owned plus accrued interest and expenses amounting to $832 million. Because the bonds were denominated in dollars, as part of the restructuring process, Argentina had agreed that repayments would be handled through a New York corporation and governed by US law. So Argentina had to accept this federal court's jurisdiction whether it liked it or not.

Clever lawyering on the part of Singer and the other holdouts noticed that Argentina had omitted to provide for holdout situations and had instead deemed all bonds repayable on pari passu (equal) terms. This is fancy lawyer lingo that prevented preferential treatment among bondholders. The holdout bondholders therefore sought, and won, an injunction in 2012 that prohibited Argentina from repaying the 93% of bonds that had been renegotiated unless they simultaneously paid the 7% holdouts their full face value for the bonds they possessed as well.

According to Michael Hudson in his book Killing the Host - How Financial Parasites and Debt Destroy the Global Economy:

These funds are called "vultures" because they feed on "dead" bonds in default. Complaining that "these hedge finds who have bought the bonds at 20-30 cents to the dollar ... now want to be repaid in full citing contractual obligations," Argentine Minister of Economics Axel Kiciloff pointed out that the vulture funds had bought the bonds "with the sole purpose of obtaining a favorable judgment [from a US court in order] to make an exorbitant profit."

In addition to demanding 100% of the bonds' full face value, Singer asked for twelve years of accrued interest (compounded), punitive damages, and reimbursement for the legal expenses incurred in his approximately 900 attempts to embargo and seize Argentine assets in any countries that would recognize his claim.

Singer's ploy had worked before. In 2008 British Courts had awarded his fund full face value principle plus interest on Congo debt. Since that time Britain has passed laws protecting highly indebted countries from being attacked by Singer's modus operandi. The US, however, has no such protection.

After failing to seize Argentine assets, Singer's lawsuit came before Second Circuit Court Judge Thomas Griesa. It was his lucky day because Griesa agreed with him that he should be able to stop Argentina from settling with 92.4% of its bondholders until Singer was paid full face value for his bonds. In 2012 Griesa directed the Bank of New York Mellon to stop disbursing Argentina's payments to the vast majority of its bondholders which had agreed to accept lower than face value for the bonds they possessed.

Even though international law has outlawed the pari passu principle, Judge Griesa insisted on it thereby placing Argentina in what amounts to a position of debt servitude and forcing them to default on the bonds they had already renegotiated with the 93%. Financial Times columnist Martin Wolf called Griesa's ruling "extortion backed by the USA judiciary."

Even though Argentina appealed to the US Supreme Court, it was of no avail as the conservative majority led by Justice Scalia ruled in favor of subjugating a government power - Argentina - to Wall Street. Scalia insisted that Singer could go after Argentina's assets if it couldn't pay up treating it just like a debtor who couldn't pay his mortgage or credit card debt.

Furthermore, the Supreme Court ruled that Argentina had to provide Singer's hedge funds with a list of assets it possessed anywhere in the world so Singer could go after them and Argentina would be responsible for his legal bills in so doing. Even after Argentina deposited money in the Bank of New York Mellon to pay interest due on June 30, 2014, Judge Griesa directed the bank to return the money and ordered Argentina to send representatives to New York to negotiate with Singer.

In an article in the New York Times, Argentina Finds Relentless Foe in Paul Singer’s Hedge Fund, it was reported:

“We’ve had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system,” said Joseph E. Stiglitz, the economist and professor at Columbia University. “We don’t know how big the explosion will be — and it’s not just about Argentina.”

As a hedge fund, Elliott’s pursuit of Argentina is motivated by a desire to make money. Having bought its Argentine bonds for well below their original value, the firm stands to make a killing if Argentina pays the bonds in full. Legal filings indicate that the face value of its Argentine government bonds was around $170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than $1.5 billion, which includes years of unpaid interest.

Michael Hudson commented:

As shaped by Judge Griesa, the Court of Appeals and the US Supreme Court, current US law forms a financial vise to prevent countries from escaping from debt deflation, rentier serfdom and seizure of their assets by creditors. Griesa's ruling threatens that without restructuring onerous foreign debts, entire economies will be driven into depression, unemployment and emigration of young labor, capped by pressures for insider privatization.

In the summer of 2014, over 400 banks, bond investors and debtor countries worked via the International Capital Market Association to limit the ability of vulture hedge funds to block settlement and compromises using the pari passu principle. Judge Griesa's ruling would be rendered obsolete and the pari passu would be defined to mean "equal treatment but not equal payouts for bondholders."

Judge Griesa's rulings had made it impossible for any debtor country to renegotiate its debts down to within its ability to pay. Any vulture fund could demand to be repaid full face value even if the majority of bondholders are willing to negotiate and receive less. Argentina's President Cristina de Kirchner called the holdouts "vultures" and "financial terrorists."

Is it any wonder then that the BRICS countries are forming their own fund from which countries could borrow in other than dollar denominated assets carrying with them the restriction that any negotiations would have to go through the US judicial system controlled by conservative judges and a conservative Supreme Court. Thankfully, Scalia is no longer there to squeeze every penny out of debtor countries for the benefit of Wall Street.

So why was Argentina able to settle now? It has not been able to borrow more money in the bond markets because of this long running situation and it is hurting. The new administration of President Mauricio Macri has taken a more conciliatory tone than did the Kirchners who called Singer a vulture and a financial terrorist. Macri decided that, rather than be forced out of the bond markets, he would rather borrow the money to pay off the vultures as long as they could then get back into the business of borrowing even more money to run the country. On Feb. 19, Judge Griesa dealt the holdouts a setback by agreeing to lift an injunction that had prevented Argentina from raising new money in bond markets or paying its creditors which led to the settlement with Singer and the other vultures. One caveat: Argentina's legislature still has to approve the deal.

However, by borrowing even more money to pay its debts, Argentina is being led down the road to insolvency and debt deflation. Borrowing money to pay off debts amounts to a huge Ponzi scheme which, when it eventually collapses, will allow the vultures to profit even more off of Argentina's carcass.

So what will Paul Singer do with his ill gotten gains which will force Argentina into debt servitude? Will he use the money for philanthropic purposes? Hardly. Currently, he's supporting Marco Rubio for President. Here's what Rubio wants to do:

1. Rubio wants to repeal Obama’s executive order to expand background checks and close gun sale loopholes.

2. When asked about closing down mosques, Rubio said he wants to shut down “any place radicals are inspired.”  

3. He denies humans are responsible for climate change.

4. His tax plan gives the top 1 percent over $200,000 in tax cuts every year. That’s as bad as Donald Trump’s tax plan.

5. He wants to cut $4.3 trillion in spending, including funds from Medicare and other programs, essentially freeze federal spending at 2008 levels for everything except the Pentagon.  

6. He wants a permanent U.S. presence in Iraq, and would end the nuclear deal with Iran, putting us on a path to war.

7. We have no way to know where he is on immigration because he’s flip-flopped — first working on legislation to regularize citizenship for undocumented immigrants, and now firmly anti-legalization.

8. He wants to repeal Obamacare.  

9. He’s against a woman’s right to choose, even in cases of rape and incest.

An excerpt from Paul Singer's New Bible:

Commandment 1: Thou shalt PAY UP.

Commandment 2: (If you disobey Commandment 1,) Thou shalt relinquish thine property.

Commandment 3: Thou shalt have no mercy for debtors.

These are the precepts to live by that take precedence over every other consideration such as "Love your neighbor as yourself" and "Do unto others as you would have them do unto you." These commandments apply both to individuals and nations. Bankruptcy is getting more difficult for both individual debtors and nations, easier for corporations. Case in point - next to impossible for student loan debtors. The goal is perpetual debt servitude presided over by a rent extracting parasite class - the 1%. In the vulture class's sights: Greece, Brazil, Spain, Italy and finally American college graduates.

The game plan is for the Fed and the European Central Bank to encourage more debt by going to negative interest rates. This is the only way they can think of to get consumers to borrow and spend more (and go into more debt) in order to keep GDP going up. US GDP consists of 70% consumer spending. Once the debtor is unable to pay, then seize or privatize (as the case may be) their assets, erect a toll booth and charge rent. This turns neighbors into beggars, provides austerity for all and allows private corporations to profit from providing essential services like water as is the case in Detroit.

Get Ready for the Market Crash and Recession of 2016

by John Lawrence from the San Diego Free Press

Oil is less than $30. a barrel. This is over three times less than what it costs just to buy the barrel itself! Iran has been accepted back into the world community and is revving up to sell its oil on the world market which will bring down the price of oil even more. Frackers and oil producers in the US have taken on a huge amount of debt under the assumption that it would pay off down the road. They hadn't counted on the price of oil plummeting. What will they do when we convert 100% to renewables?

The debt overhang in the US economy is, as The Donald would say, UUUUGE! All the Wall Street banks and hedge funds, which have bet on the US becoming oil independent and have bought derivatives up the ying yang, are on the losing end of their bets. This presages a crash similar to the mortgage based crash of 2008. Then the Big Banks will ask for another bailout. Or maybe they won't ask; they'll just tell us that we're bailing them out because, after all, they run the government.

Goldman Runs the Government While Committing Fraud

Goldman Sachs runs the government's finance department. Treasury Secretaries Robert Rubin (1995-99) and Hank Paulson (2006-2009) were at Goldman from 1966 to 1992 and 1974 to 2006 respectively. At Treasury, Paulson was aided by Chief of Staff Mark Patterson (Goldman lobbyist 2003-2008), Neel Kashkari (Goldman Vice President 2002-2006) , Under-Secretary Robert K Steel (Vice Chairman at Goldman, where he worked from 1976 to 2004), and advisors Kendrick Wilson (at Goldman from 1998 to 2008) and Edward C Forst (former Global Head of Goldman's Investment Management Division).

Paulson's successor, Timothy Geithner, a protege of Robert Rubin, was kept close to the Goldman fold with the usual tactic of paying him lucrative speaking fees, the same tactic they use to keep Hillary's ear. I could go on with Goldman's connections to the US government, but I don't want to bore you. For a fuller account I refer you to Michael Hudson's book, Killing the Host, How Financial Parasites and Debt Destroy the Global Economy.

This January 2016 Goldman admitted to committing massive fraud and was fined $5 billion. The Wall Street firm had agreed with federal prosecutors and regulators to resolve claims stemming from the marketing and selling of faulty mortgage securities to investors. These are the people who are running your democratic (ha, ha) government. While the 99% got screwed, Wall Street got bailed out because they ARE the government.

But not to worry. This looming market crash is a problem for the big guys, the billionaires, the investor class, not the 99%. The mortgage defaults of 2008, on the other hand, brought real pain to the middle class. While the banks got bailed out, the average middle class homeowner did not. HAMP, the Home Affordable Mortgage Program which was supposed to help homeowners stay in their homes with loan modifications, was a colossal failure.

The program gave permanent mortgage modifications to 1.3 million people, but 350,000 of them defaulted again on their mortgages and were evicted from their homes. Fewer than one million homeowners remain in the HAMP program – just a quarter of its target – and $28 billion of the funding remains unspent. The HAMP program, supposed to help homeowners save their houses, may have led them deeper into a bureaucratic swamp.

401ks - the Worst Idea Perpetrated on the American People

Now that that crisis has settled down, the main worry of the middle class is that, when the stock market tanks, so will their 401k. 401ks were one of the worst travesties visited on the average American worker. Folks lucky enough to have traditional pensions don't have to worry especially if it's a government pension. On the other hand those with traditional pensions from corporations have to worry about corporate raiders and hedge fund takeover artists raiding their pension funds. Those with 401ks are taking all the risk in their individual portfolios over which they have no control really. They are at the mercy of the market and Wall Street. God help them.

There is also widening inequality which means that American consumers have less money to spend to keep the economy going. US GDP depends on consumer purchases because they are 70% of the economy. If everyone goes to ground and starts growing their own vegetables and keeping their own chickens, all those nonpurchases at the supermarket will drive the economy down. 2015 was a big year for car sales; that means that 2016 will not be because consumers are carred up.

Robert Reich thinks the economy is on the edge of recession:

Consider: The median wage is 4 percent below what it was in 2000, adjusted for inflation. The median wage of young people, even those with college degrees, is also dropping, adjusted for inflation. That means a continued slowdown in the rate of family formation—more young people living at home and deferring marriage and children – and less demand for goods and services. 

At the same time, the labor participation rate—the percentage of Americans of working age who have jobs—remains near a 40-year low. 

The giant boomer generation won’t and can’t take up the slack. Boomers haven’t saved nearly enough for retirement, so they’re being forced to cut back expenditures.

Wall Street and hedge funds are running the economy. They are the central planners not the US government which is basically just a pawn in their hands. They borrow money from the Federal Reserve at extremely low rates and then buy Treasury bonds which amounts to making money off the spread or making money off their ability to finance the American government which boils down to us, the American taxpayers.

Fortunately, the US isn't dependent on Japanese or Chinese or Saudi Arabian investors to buy its bonds. Wall Street has taken over that role in a symbiotic Ponzi scheme which requires the Fed, Wall Street and the US Treasury to all play their parts. That means that now the Big Banks are really, really Too Big To Fail. They are an essential part of funding and running the US government!

Better to Put Your Money Under the Mattress

While Wall Street banks are too big to fail, the next banking crisis could trigger not a bail out but a bail in. According to Ellen Brown, the mechanics are already in place to loot depositors' bank accounts:

While the mainstream media focus on ISIS extremists, a threat that has gone virtually unreported is that your life savings could be wiped out in a massive derivatives collapse. Bank bail-ins have begun in Europe, and the infrastructure is in place in the US. Poverty also kills.

At the end of November, an Italian pensioner hanged himself after his entire €100,000 savings were confiscated in a bank “rescue” scheme. He left a suicide note blaming the bank, where he had been a customer for 50 years and had invested in bank-issued bonds. But he might better have blamed the EU and the G20’s Financial Stability Board, which have imposed an “Orderly Resolution” regime that keeps insolvent banks afloat by confiscating the savings of investors and depositors. Some 130,000 shareholders and junior bond holders suffered losses in the “rescue.”

Something to think about. Maybe hiding your money under the mattress is the best solution since it's not earning any interest in the bank anyway.

Thom Hartmann has written a book, The Crash of 2016: The Plot to Destroy America--and What We Can Do to Stop It. Marketwatch.com writes:

“The United States is more vulnerable today than ever before including during the Great Depression and the Civil War,” says Thom Hartmann, in “The Crash of 2016.” Why? “Because the pillars of democracy that once supported a booming middle class have been corrupted, and without them, America teeters on the verge of the next Great Crash.” Thanks to an obstructionist GOP, hell-bent on destroying Obama the past six years. [Thom's] indictment hits hard, but matching something you might hear from Rush Limbaugh on the Right.

“The United States is in the midst of an economic implosion that could make the Great Depression look like child’s play,” warns Hartmann. His analysis is brutal, sees that “the facade of our once-great United States will soon disintegrate to reveal the rotting core where corporate and billionaire power and greed have replaced democratic infrastructure and governance. Our once-enlightened political and economic systems have been manipulated to ensure the success of only a fraction of the population at the expense of the rest of us.” And he wrote that before Picketty’s “Capital in the 21st Century.”

The US has a boom bust economy. Unfortunately, the busts are becoming more frequent and the booms more superficial. People get all euphoric when the stock market goes up. As someone once said, it leads to "irrational exuberance." Then when it crashes, they sell leaving their 401ks and retirement incomes in shambles. That's what happens when investing is left in the hands of amateurs. The big guys, the hedge funds will make money either way - when the stock market goes up they go long; when it goes down they're short. They are high frequency traders and act on insider information. They commit fraud.

They have billions of dollars at their disposal from low interest loans from Wall Street. That's why they can buy entire corporations, break them up, lay off the employees, raid their pension funds and sell the remaining eviscerated hulk off to the unsuspecting and naive. The hedge (vulture) funds and Wall Street make out like bandits which is what they essentially are. The banks, whose function used to be capital formation to fund industry which created jobs, now functions as a conduit to hedge funds to wreak havoc with the American economy in pursuit of short term profits.

The world is polarized between the uber wealthy and the rest of us. Just 62 people own as much wealth as the 3.6 billion poorest. That's globalization for you. Nation states are no longer important or in control. The uber wealthy, the billionaires, who can buy and sell politicians and governments at their whim are the controllers. They - not the communists or socialists - are the central planners of the economy, and their plan for the economy is to benefit them and only them. The World Bank and the IMF are their henchmen.

The New Feudalism - Billionaires Replace the Nobility

This is from a recent report from Oxfam, AN ECONOMY FOR THE 1% How privilege and power in the economy drive extreme inequality and how this can be stopped:

The gap between rich and poor is reaching new extremes.  The richest 1 percent have now accumulated more wealth than the rest of the world put together… Meanwhile, the wealth owned by the bottom half of humanity has fallen by a trillion dollars in the past five years.”

The wealth of the richest 62 people has risen by 44 percent in the five years since 2010—that’s an increase of more than half a trillion dollars ($542 billion), to $1.76 trillion,” Oxfam noted. “Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the same period—a drop of 41 percent. Since the turn of the century, the poorest half of the world’s population has received just 1 percent of the total increase in global wealth, while half of that increase has gone to the top 1 percent.

There is really only one candidate for President who is addressing these issues - Bernie Sanders. Republicans want us to take our eyes off the ball of growing inequality and impoverishment of the 99% while the billionaires take on the role of oligarchs. They want us to focus on international terrorism and the threat that that brings to our everyday lives.

While that is surely a threat, ISIS cannot do major damage to the US. A few people can be blown up here and there and that is a tragedy. It's just not as great a tragedy as the gun violence done by Americans to other Americans on a daily basis which is orders of magnitude bigger.

If the economy takes a tumble, Hillary Clinton's ties to Wall Street will take on an even more ominous cloud over her campaign while the fact that Bernie Sanders has raised millions in small donations without the help of Wall Street or Super PACs will cast him in an even more favorable light. That might be the deciding factor. The Republicans will surely be left behind if they place all their bets on getting the American people to vote for them out of fear of ISIS.

Uber Capitalist, Martin Shkreli, the Most Hated Man in America, Arrested

by John Lawrence from the San Diego Free Press

The Poster Boy for Corporate Greed

Martin Shkreli, CEO of Turing Pharmaceuticals, who bought the drug, Daraprim and then raised the price from $13.50 to $750. a pill was arrested on December 17 by the FBI on fraud charges having nothing to do with his price gouging with Daraprim. Shkreli seemed to back off on his 5000% increase for a life saving drug after he received a lot of negative publicity, but later said that he wished that he had raised the price of the drug even more. A silent chorus went up all over America, "He's getting what he so richly deserves!" It does seem like Karma, doesn't it?

Earlier this month Shkreli talked about his second thoughts at a health care conference sponsored by Forbes. "I probably would have raised the price higher. That's probably what I would have done. I think health care prices are inelastic. I could have raised the price higher and made more profits for my shareholders which is my primary duty. And again no one wants to say it, no one's proud of it, but this is a capitalist society, capitalist system and capitalist rules and my investors expect me to maximize profits, not minimize them or go half or go 70% but to go to 100% of the profit curve ..."

So the ultimate solution for this capitalist is maximizing value for his shareholders (and for himself, by the way) and if a few people who can't afford this life saving drug have to die along the way that's just the cost of dong business, collateral damage, because what's most important is profit maximization. The Ultimate Solution becomes synonymous with Hitler's Final Solution.

This is from Nation of Change:

“As alleged, Martin Shkreli engaged in multiple schemes to ensnare investors through a web of lies and deceit. His plots were matched only by efforts to conceal the fraud, which led him to operate his companies, including a publicly traded company, as a Ponzi scheme, where he used the assets of the new entity to pay off debts from the old entity. When regulators and auditors questioned Shkreli’s decisions, he joined forces with Evan Greebel, who used his law license and training to conceal and further the scheme,” stated U.S. Attorney Robert Capers on Thursday. “The charges and arrests announced today reflect our commitment to hold accountable corporate executives and licensed professionals who betray their positions of trust in order to fraudulently enrich themselves.”

According to the seven-count indictment, between September 2009 and September 2014, Shkreli and his co-conspirators orchestrated three multimillion-dollar schemes to defraud investors and potential investors in MSMB Capital, MSMB Healthcare, and Retrophin. Between September 2009 and January 2011, Shkreli failed to disclose to investors that he had lost all the money he managed in Elea Capital, his prior hedge fund, and that Lehman Brothers had a $2.3 million default judgment against him. Shkreli lied to his largest investor telling him that MSMB Capital had $35 million in assets under management, when in fact it had less than $700 in its bank and brokerage accounts.

After Shkreli bilked approximately $3 million from eight investors, MSMB Capital failed to settle a trade of over 11 million shares of Orexigen Therapeutics, Inc. (OREX) that Merrill Lynch ultimately closed at a loss of over $7 million. While providing investors with fabricated performance updates, Shkreli also allegedly misappropriated more than $200,000 from MSMB Capital to cover his personal and professional debts.

Following the subsequent collapse of MSMB Capital, Shkreli began soliciting investments for MSMB Health while concealing his disastrous past performance, including the $7 million liability that Shkreli owed Merrill Lynch for the February 2011 OREX trades. From approximately February 2011 to November 2012, Shkreli also falsely represented that MSMB Healthcare had $55 million in assets under management. After acquiring $5 million from 13 investors, Shkreli improperly used MSMB Healthcare assets to pay for obligations that were not its responsibility, including the failed OREX trades.

Trifecta: Lies, Deceit, Greed

In an effort to pay off Shkreli’s personal and professional debts, Shkreli, Greebel, and their co-conspirators engaged in a scheme to defraud Retrophin by misappropriating its assets between March 2011 and September 2014. After reportedly lying to the U.S. Securities and Exchange Commission (SEC), Shkreli and Greebel caused Retrophin to pay more than $3.4 million in cash and stocks to settle claims with seven MSMB Capital and MSMB Healthcare investors.

“The charges announced today describe a securities fraud trifecta of lies, deceit, and greed. As charged, Martin Shkreli targeted investors and retained their business by making several misrepresentations and omissions about key facts of the funds he managed. He continued to lie about the success of the investments and used assets from Retrophin to payoff MSMB investors. In the end, Shkreli and Greebel used a series of settlement and sham consulting agreements that resulted in Retrophin and its investors suffering a loss in excess of $11 million. While the charges announced today are significant, they are but one example of what’s left to come as the FBI continues this investigation,” stated FBI Assistant Director-in-Charge Diego Rodriguez.

In 2014, Retrophin’s board fired Shkreli and later sued him for breaching his duty of loyalty to the company. After purchasing the exclusive rights to sell Daraprim, Shkreli gained notoriety by suddenly raising the price of the drug by 5,500%. He also recently bought an unreleased Wu-Tang Clan album for $2 million and sent a campaign contribution to Sen. Bernie Sanders, but the presidential candidate refused to accept the dirty money.

Never one to let grass grow under his feet, Shkreli gained control of another company, KaloBios in November by buying its stock on the open market. KaloBios owned the rights to an inexpensive drug used for decades to treat Chagas' disease in South America. UC Davis has suspended its clinical trials of the drug, KB003, used to fight Leukemia after Shkreli was arrested. Shkreli's probable plan was to get the drug approved for use in the US and then jack up the price as he had done with Daraprim. KaloBios shares plunged 53 percent on December 18, the day after the arrest, before trading was halted.

Clearly, no one feels sorry for Martin Shkreli. You live by the sword, you die by the sword. Or we might say that if you live by the rules of capitalism, you'll die by those same rules and no one will mourn your death. The uber capitalist has made his bed; now he will have to lie in it. He could get 20 years in prison for his failed approach to capitalism. It still might have worked out OK for Shkreli if only he had not attracted such negative attention. Probably lots of other guys are doing the same thing. In fact all of Wall Street is based on fraud and Ponzi schemes. Bernie Sanders said, "The business model of Wall Street is greed and fraud."

Earlier this year five major Wall Street banks pleaded guilty to fraud and agreed to pay $5.6 billion in fines. The biggest global banks have paid more than $60 billion in penalties over the past two years to resolve allegations of wrongdoing. So what Shkreli was doing was nothing more than what the business model for Wall Street consists of. They're all doing it, but this won't constitute much of a defense for Shkreli. He's being made an example out of just like Bernie Madoff was.

A few weeks ago I reported on Shkreli in a piece entitled A Greedy Capitalist Gets His Comeuppance. One San Diego Drug company, Imprimis, developed a generic pill that would accomplish the same results as Daraprim, and they would sell it for a dollar a pill closer to the actual manufactuiring costs and still make a profit. I said at that time that this would be the downfall of Martin Shkreli and Turing Pharmaceuticals. Adios, you Greedy Bastard. However, it seems that now Shkreli has fallen even farther. He might even have to turn over his Wu Tang Clan album in order to pay off his debts. No one is crying for him. He called himself "the world's most eligible bachelor." Now he might have to find his romantic partners in a jail cell. It's not a pretty picture, but he deserves it. He might even be in the position of commiserating with Ponzi scheme king, Bernie Madoff.

It's been reported that Shkreli's lawyers have raised their fees 5000%. All fair and square under the rules of capitalism. Now that the shoe's on the other foot, Shkreli will have to live with the rules he so loved and endorsed.

The Hedge Fund That Ate Chicago

AlterNet             /               By Les Leopold          April 23, 2014  |

 

A political fight in Chicago could determine the future of pensions and public services.

 

 

There's a battle royale raging in Chicago. It pits hedge funds, the Chicago financial exchanges, real estate interests and Mayor Rahm Emanuel on the one side, against public employee unions and community groups on the other.

At issue is whether public employee pension benefits should be slashed. Mayor Emanuel claims that, "If we make no reforms at all across our pension funds, we would have to raise City property taxes by 150%.... Businesses and families would flee, not just from our city but from our state." By 2017, he claims the city will have to pay $2.4 billion a year into the pension fund.  

The public employee unions and community activists contend that city's fiscal problems could be solved easily through a small sales tax on financial trades on the Chicago Mercantile Exchange and the Chicago Board Options Exchange.

The outcome may determine the health and well-being of pension funds as well as public services all across the country.    

Wall Street buys a Mayor?

When Rahm Emanuel worked as a presidential assistant in the Clinton administration, he earned $118,000 a year. After he left his White House job in 1998, he got a raise, making  over $18 millionin the next two and a half years working for the "boutique" investment banking firm of Wasserstein Perella. Emanuel had no previous banking experience.

Ken Griffin, the CEO of the Chicago-based Citadel hedge fund and "his wife Anne Dias Griffin, donated more than $200,000 to Mayor Emanuel’s campaign for Mayor in 2011," report David Sirota and Ben Joravsky in Pandodaily. "Griffin describes the mayor as his 'good friend'. Other Citadel employees have donated about $178,000 to Emanuel’s campaign."

The 45-year-old Griffin's income for 2013 was $900 million (or about $492,632 an hour).

Apparently a good deal of his income comes from high-frequency trading (see my summary) that runs through the two Chicago financial exchanges. "His Citadel LLC returned more than 300 percent in a fund started as a high-frequency strategy," according to Bloomberg News.

Griffin, alone, could fund all of Chicago's pension liabilities for the current year (estimated at $692 million) and still have $208 million left to scrap by on. Yet Griffin is terribly worried that the mayor is being too soft on retirees. He "castigated Chicago and Illinois politicians for not making 'tough choices,' blaming Democrats who control city, county and state government for not fixing pension, education and crime problems," reports Crain's.

Mayor's Payback?

"On March 5," report Sirota and Joravsky, "Chicago’s city council overwhelmingly voted to approve Mayor Rahm Emanuel’s proposal to divert $55 million of taxpayer resources into a new privately run hotel in the city’s south loop." The Marriot was selected to run "one of America’s largest hotels next to America’s largest convention center—and doing so with massive taxpayer subsidies, but without having to pay to construct the hotel and without having to pay property taxes."

As luck would have it, Griffin is likely to make a great deal of money on this deal: "In the months before the development deal was announced, Griffin’s hedge fund was buying up large blocs of Marriott stock." What a coincidence!

Why Does a Millionaire Mayor and a Billionaire Hedge Fund CEO Team Up to Attack Public Pensions?

Because that's where the money is, and lots of it. Mayors and governors want to reduce pension fund contributions so that they can continue to lavish tax breaks and subsidies on their corporate patrons and still balance their budgets. In Chicago, the yearly cost of those corporate tax subsidies is already higher than the yearly costs of Chicago's pension fund outlays, according to an analysis by Goods Jobs First.  

Hedge funds and other financial firms join the attack, and perhaps instigate it in the first place, because they want the lucrative business of advising and investing all those pension dollars. In New Jersey, Governor Christie's administration awarded a $300 million pension management contract to a controversial hedge fund thatalso is major contributor to Christie's re-election campaign.

The Wall Street-trained treasurer of Rhode Island, Gina Raimondo, rammed through severe cuts to public pension funds, while her hedge fund allies lined up at the trough. As Matt Taibbi reports, Rhode Island's "strategy for saving money involved handing more than $1 billion—14 percent of the state fund—to hedge funds, including a trio of well-known New York-based funds: Dan Loeb's Third Point Capital was given $66 million, Ken Garschina's Mason Capital got $64 million and $70 million went to Paul Singer's Elliott Management." 

The amazing irony is there would be no talk of a pension "crisis" at all were it not for the fact that Wall Street crashed the economy. The hedge funds that covet pension fund reform and pension fund contracts were full partners in the reckless gambling spree that took down the economy and destroyed 8 million jobs in a matter of months. As economist Dean Baker shows  the pension shortfall is primarily the result of the 2007-'08 crash in the financial markets. "If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today."

The lesson learned should be this: If you use hedge funds to run your pension funds, you'll get fleeced come the next crisis.

Why Are the Financialists Getting Away With It?

Rahm Emanuel, Chris Christie and hundreds of other politicians are able to attack public pension funds with impunity because defined benefit pensions in the private sector are an endangered species. One demagogic question is all they need to ask and they ask it again and again:  

"Why should you pay taxes for public employee benefits that you don't have?"

Such an attack only works because Wall Street already has systematically destroyed private sector defined benefit pension funds—which are funds that provide retirees with a set payment for life (and sometimes beyond for spouses). Employers can reduce their costs by switching from defined benefit pensions to defined contribution 401ks. Better yet they might be able to eliminate the employer contributions altogether. Employees usually benefit more from defined benefit pensions and are very reluctant to see them altered. (For more about defined pension funds see here.)  

As the chart below demonstrates less than 15 percent of private sector employees now have defined benefit pension programs, down from nearly 40% in 1979. Meanwhile, 401ks have grown from 16% to over 42%. This didn't happen by accident.

 

Wall Street Strip-Mines Private Pension Funds

Defined pension funds are disappearing for two overlapping reasons. The first is that unions, the main driver of defined-benefit pensions, are in decline. Today, union's represent less than 7 percent of the private sector workforce, down from 35% in 1955. But that's only part of the story.

The most crucial cause is the deregulation of the financial sector which started in the late 1970s. Once freed from their New Deal shackles, corporate raiders (now called private equity firms, hedge funds and investment firms) strip-mined thousands of corporations using borrowed money. Those debts were (and still are) placed on the books of the target company and its cash flow is used to pay the interest on the debts as well as pay huge sums to the raiders, their investment advisors, their bankers, and the compliant top managers of the target company.

How does the target firm pay for all these new costs? The raiders, of course, claim that through their own entrepreneurial genius, they "unlock" hidden value. In reality, they milk the company in every way imaginable. They sell off product lines, shut down facilities, move work off-shore, slash R&D, and raid the pension fund, claiming it was "overfunded." Often the target company also tries to discontinue the pensions entirely or shift to 401ks forcing the employees to kick in most of the money. Many corporations become so loaded up with debt that they go into bankruptcy, through which they can further whittle away employee benefits and reduce or discontinue pensions.

As the financial strip-mining proceeds through thousands upon thousands of corporations, the average worker loses his or her benefits, and the financial strip-miners become filthy rich. As the chart below shows, in 1970 the top 100 CEO earned $45 for each $1 earned by the average worker. By 2006, the ratio jumped to 1,723 to one.

 

A Tax on Financial Strip Mining?

The financial transaction tax (sometimes called a financial speculation tax or Robin Hood Tax) is designed to retrieve some of the money that is being siphoned away from our wages, benefits and tax dollars. Because the super-rich, their hedge funds and their corporations have a myriad of ways to avoid income taxes, especially by shifting money offshore, the financial transaction tax hits them where they live—buying and selling financial assets on the markets, especially on the Chicago exchanges where derivatives and futures contracts are sold.

It is estimated that a minuscule tax ($1 dollar on both the buyer and on the seller of future contracts, and $2 on derivatives contracts) would generate $12 billion a year for Illinois. That would be $9.6 billion more than $2.4 billion pension shortfall Mayor Emanuel claims Chicago will face in 2017. That still leaves more than enough money to dramatically improve education and even make higher education tuition free in Illinois (thereby cutting into Wall Street's predatory student loan business).

While such a tax could easily fulfill the promises made to public employees, it might also be prudent and just to use some of the financial tax to create a statewide defined benefit pension fund for private sector as well as public employees. That should put an end to the divide-and-conquer tactics opportunistic politicians and their hedge fund cronies use to enrich themselves and their political ambitions.

Can the financial transaction tax become reality?

Let's take heart from what Rahm Emanuel infamously said when serving as President Obama's chief of staff at the height of the financial crisis:

"You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before."

Les Leopold is the director of the Labor Institute. His most recent book is "How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning of America's Wealth (Wiley, 2013)." His next book project will focus on why the richest country on earth is so poor.

Twinkies' Twisted Tale: Junk Food Devoured by Junk Bonds

by John Lawrence from San Diego Free Press

All the late night talk shows laughed it up over the supposed demise of Twinkies, Ho Hos, Ding Dongs, Wonder Bread etc as the news came out that Hostess Brands was going bankrupt. But delve beneath the surface and you will find something more akin to a Shakespearian tragedy than talk show banter. It's a tale involving two unions, one private equity fund, two hedge funds and a whole cast of former CEOs. There is sacrifice, greed and betrayal. 18,000 workers will be losing their jobs while some vulture capitalists will be walking away with millions. Another vulture capitalist will itself have been devoured in the process.

The Hostess name dates to the 1920s, when the Continental Baking Co. in New York City sold "Wonder" bread goods and "Hostess" cake products. Through a series of mergers, Continental became the largest commercial bakery in the U.S. Then the company was bought and sold numerous times with many mergers and acquisitions along the way finally ending up as the Interstate Bakeries Corporation. Hostess has been sold at least three times since the 1980s, racking up debt and shedding profitable assets along the way with each successive merger. Then the company filed for bankruptcy in 2004. After it emerged from the longest bankruptcy in history in 2009, it had changed its name to Hostess Brands and a private equity group, Ripplewood Holdings had taken control of the company with a 50% equity stake. There were also loans and lines of credit from hedge funds, Silver Point Capital and Monarch Alternative Capital. Hostess Brands' union workers agreed to pay cuts and made contract concessions in exchange for equity.

The difference between a private equity fund and a hedge fund is that a private equity fund takes full or partial ownership of the company using money borrowed by the company that they take over. They used to be called leveraged buyout firms or LBOs. What they end up with is called an "equity stake." A hedge fund just makes strategic bets in the markets hoping to get a huge return. In this case the money they invested in Hostess Brands would either pay off in huge returns if the company stayed in business or potentially even greater returns if the company went bankrupt and its assets were sold off. In that case the hedge funds would be first in line to recoup their investment.

There were two unions involved: the Teamsters who delivered the products to stores and the Bakery, Confectionery, Tobacco Workers and Grain Millers' International Union who actually made the products. There are around 18,000 unionized workers in all employed by Hostess.

Here's where the plot thickens. The Bain Capital playbook calls for private equity companies like Bain to acquire ownership of a company, take out huge loans in the company's name, pay its executives huge dividends and management fees, lay off unionized workers and then either sell the company or take it into bankruptcy and sell off the assets making millions more. In the case of Hostess Brands the main assets are the brand names Twinkies, Ho Hos, Wonder Bread, Zingers, Ding Dongs etc all with established markets. In Naomi Klein's book, "No Logo," she points out that in today's marketplace it is only the brand names that count. Manufacturing is passe and is contracted out to other companies, those companies in particular that produce the goods for the least contract price mainly in Asian sweatshops. Hostess was a "legacy" company in the sense that its workers were unionized, worked directly for Hostess and had decent wages and benefits. Like most private equity firms Ripplewood's covert plan was to cut costs by getting rid of unionized workers. Then it could capitalize on Hostess Brands most valuable asset, the brand names of the products themselves.

The general idea with reference to Tommy Hilfiger brands is as follows (from "No Logo" by Naomi Klein):

"Tommy Hilfiger, meanwhile, is less in the business of manufacturing clothes than he is in the business of signing his name. The company is run entirely through licensing agreements, with Hilfiger commissioning all its products from a group of other companies: Jockey International makes Hilfiger underwear, Pepe Jeans London makes Hilfiger jeans, Oxford Industries make Tommy shirts, the Stride Rite Corporation makes its footwear. What does Tommy Hilfiger manufacture? Nothing at all."

So by signing all his clothes with the Tommy Hilfiger brand while manufacturing nothing, Tommy Hilfiger has managed to turn his faithful adherents into walking, talking life-sized billboards. All the value is in the brand rather than in the products themselves. Similarly Nike, the Gap, Ralph Lauren, Calvin Klein, Liz Claiborne and others operate in the same way.

It's not a stretch to imagine that the main assets of Hostess Brands are the very names of its products, Twinkies, for example. And in a liquidation these could command millions of dollars. The products themselves could be manufactured anywhere and shipped to the US if necessary. Since they are all loaded with preservatives, spoilage is not a problem.

But first Hostess Brands management had to go through the charade of getting rid of its unionized workers. On January 10, 2012, Hostess Brands filed for Chapter 11 bankruptcy for the second time, but management said that it would continue to operate with $75 million debtor-in-possession financing from Monarch Alternative Capital, Silver Point Capital and other investors.The company stopped paying future pension benefits after August, thereby breaking its union contracts. As already mentioned, workers had given up a lot in the 2004 bankruptcy. When management demanded even more concessions and the bankruptcy judge gave Hostess permission to force the bakers' union to accept a new five-year labor contract that featured an 8% wage cut in the first year, new pension plan restrictions and a 17% increase in health care costs for employees, the workers struck in November 2012.  While it wanted to cut worker wages and benefits again it came out that Hostess Brands’ management had given themselves several raises in the previous year, all the while complaining that the workers were grossly overpaid relative to the company’s increasingly dismal financial position.  Fortune reported that unions had been unhappy with CEO Driscoll's proposed compensation package of $1.5 million, plus cash incentives and a $1.95 million "long term compensation" package.

The Teamsters union managed to come to an agreement with Hostess management, but the Bakery, Confectionery, Tobacco Workers and Grain Millers' International Union (BCTGM) went on strike after the latest contract proposal from Hostess Brands was rejected by 92 percent of its members. The Teamsters agreed not to cross picket lines.

On November 16, 2012, Hostess announced that it was ceasing plant operations and laying off most of its 18,500 employees. It stated that it intended to sell off all of its assets, including the well known brand names, and liquidate. The new CEO, Gregory Rayburn, stated, "Hostess Brands will move promptly to lay off most of its 18,500-member workforce and focus on selling its assets to the highest bidders." Of course, this is what Hostess wanted to do all along, at least some of its principles. In an ironic twist of fate, private equity Ripplewood Holdings which, according to the Bain Capital playbook, should have profited from selling off Hostess Brands assets had screwed up and had cut a deal with Monarch Alternative Capital and Silver Point Capital that, in return for its infusion of cash after the latest bankruptcy and the resultant debt that those hedge funds owned, they would be the first to be paid in the event of a bankruptcy and a liquidation. It is called "secured debt" as opposed to "unsecured debt." As it turned out there was a hierarchy of creditors with these two companies standing at the top of the pyramid. So lucrative was the deal they had struck with Hostess that, when they walk away with their millions after the assets are sold off, there will be little left for anyone else including private equity firm Ripplewood Holdings. Monarch and Silverpoint will come away smelling like roses while everyone else including the workers will get screwed.

After a mediation charade, the bankruptcy court judge went ahead and gave Hostess Brands most recent CEO, Gregory Rayburn, permission to close on November 21, 2012 leaving workers with a massively underfunded pension plan, an unhappy Thanksgiving and the prospect of a bleak Christmas.

The BTCGM released the following statement: 

“Hostess’s announcement that it is liquidating the company is a deep disappointment for all of our Hostess members. While Hostess management wants to blame our members for the demise of the company, the truth is that had it not been for the valiant efforts of our members over the last eight years, including accepting significant wage and benefit concessions after the first bankruptcy, this company would have gone out of business long ago.

“Hostess failed because its six management teams over the last eight years were unable to make it a profitable, successful business enterprise. Despite a commitment from the company after the first bankruptcy that the resources derived from the workers’ concessions would be plowed back into the company, this never materialized. Management refused to invest in modernizing its bakeries or devote necessary resources to advertising and marketing, product development and new technology. Business plan after business plan failed, leaving the company ever deeper in debt.

“When a highly-respected financial consultant, hired by Hostess, determined earlier this year that the company’s business plan to exit bankruptcy was guaranteed to fail because it left the company with unsustainable debt levels, our members knew that the massive wage and benefit concessions the company was demanding would go straight to Wall Street investors and not back into the company.

“Our members were aware that while the company was descending into bankruptcy and demanding deep concessions, the top ten executives of the company were rewarding themselves with lavish compensation increases, with the then CEO receiving a 300 percent increase.

“Our members decided they were not going to take any more abuse from a company they have given so much to for so many years. They decided that they were not going to agree to another round of outrageous wage and benefit cuts and give up their pension only to see yet another management team fail and Wall Street vulture capitalists and “restructuring specialists” walk away with untold millions of dollars.

“Throughout this long and difficult process, BCTGM members showed tremendous courage, solidarity and devotion to principle. They were well aware of the potential consequences of their actions but stood strong for dignity, justice and respect.”

How Mitt Romney Drove Companies Bankrupt, Raided Pension Funds and Paid Himself Handsomely

by John Lawrence from the San Diego Free Press

Mitt Romney's Bain Capital was very good at making money for Mitt Romney. At the same time it loaded companies Bain bought with debt, borrowed even more money to pay dividends to Mitt Romney and destroyed or outsourced lots of jobs. It even raided pension funds. Then Romney turns around and holds himself up as a "successful businessman." Sure he was successful in terms of making money for himself. But this was at the expense of those workers at previously successful companies who lost their jobs when those companies went bankrupt thanks to the debt loaded on them due to money borrowed from banks that went directly into Romney's pocket.

Here's how a private equity fund such as Bain Capital works. It picks a successful company and then takes it over with a leveraged buyout (LBO). The money borrowed from a bank to pay off the owner or stockholders does not become the debt of Bain Capital. It becomes the debt of the company that was taken over. You might ask, "Why would a bank even loan money to place a company in debt for the purposes of being taken over by Bain Capital which does not even assume the debt?" Well, it's for the same reason that so many subprime loans were available. The bank does not continue to hold the loan. It offloads it to investors such as pension funds so the bank doesn't really care. They have no skin in the game. Why not loan Mitt Romney money to take over companies? There's good money in those commissions.

Pension funds show up again and again as the fall guys in Wall Street machinations. They are the dumb clucks who keep trying to make up for the fact they are 50% underfunded by entering into sucker bets and losing even more money. And since Romney and Bain do not assume the debt themselves, they don't care if the overleveraged company goes bankrupt since, if it does, they lose nothing. That company is just a money conduit for Romney since, as soon as they take it over, they have the company borrow even more money in order to pay Romney a dividend. You might ask. "Why would the owners of a company or the shareholders sell out to Bain Capital?" Because Bain offers them a really good deal, that's why. After all they don't care if they overpay. They're using OPM, other people's money. It's all based on a loan to the company they intend to take over, not a loan to Bain itself. Bain takes hardly any risk at all. So much for the risk takers that Romney eulogizes.

Romney pioneered the strategy of having a company Bain took over in a leveraged buyout borrow even more money to pay himself a dividend. So now the company is staggering under a huge load of debt and in many cases they can not keep up with the payments. In 1994 Bain bought medical equipment manufacturer Baxter International. After a merger with another company, it became known as Dade Behring. Bain then reduced R&D investment because Bain's game plan was to only hold the company for five years or so. So why invest for the long haul? The money borrowed from banks for the LBO was usually for five to eight years with small monthly payments and a big balloon payment at the end. About five years after Bain had acquired Dade, it was looking to get out. But not before it drained even more money from Dade and placed the company and its workers in even more jeopardy.

Bain froze the workers' pension benefits and converted them from a defined benefit plan, in which employees were entitled to 75% of the average of their last three years' salaries, to a cash-balance plan in which they would get a lump sum equal to what they were owed in 1999. Workers were furious. They threatened to sue, but never went through with the lawsuit because they were fearful of losing their jobs. Dade saved $10 to $40 million with this strategem. The very month Dade did the conversion, it used the projected savings as the basis to borrow $421 million placing Dade in even more debt. The result was that Dade paid Bain and its partner Goldman Sachs the entire amount as a dividend. Bain and Goldman had only put down $81 million to buy the company in the first place. Yet in June 1999 they received $365 million from the dividend, a gain of 4.3 times their initial investment. Consequently, Dade's debt more then doubled to $871 million in order to make this huge payment to Bain and Goldman. Romney had left operational management of Bain that year, though his disclosures show that he owned 16.5 percent of the Bain partnership responsible for the Dade investment until at least 2001. In order to make their loan payments, Dade had to cut not only R&D but also the core of the company. It sold off assets and fired workers. Nevertheless, the whole thing came crashing down in 2002 when Dade filed for bankruptcy protection. It was the end of Bain's and Goldman's involvement with Dade. They had looted the entire company, raided the pension fund, albeit indirectly, and caused mega job losses. Nevertheless, Romney could turn around calmly, face the cameras and proclaim himself a "successful businessman" for having made hundreds of millions of dollars for himself and his investors. Bain and Goldman had made a $280 million profit on an investment of only $85 million. Is this what America is all about? Is this what freedom consists of? Romney seems to think so.

Later Dade emerged from bankruptcy and, after increasing its investment in R&D, went on to become a successful company probably because Romney and Bain were no longer in the picture. They had done their part forcing the company into bankruptcy by having Dade take out huge bank loans in order to pay Romney and Goldman dividends.

Bain used the same playbook with several other companies: put down a small down payment, get a bank loan (which the bank resells to other investors) for a leveraged buyout (in which the company not Bain assumes the debt) and then after taking ownership get another bank loan to pay Bain a huge dividend while saddling the company with even more debt. As a result of these tactics at least six companies filed for bankruptcy between 1992 when Romney took over Bain Capital and 2004. The reason that Romney wants us to believe that he had nothing to do with Bain after 1999 is that most of these companies filed for bankruptcy between 2000 and 2004. Nevertheless, according to SEC filings Romney was sole owner and operational manager of Bain until 2001. During this period there were several multimillion-dollar investment deals, bankruptcies and a spate of layoffs and overseas job shifts at Bain-owned companies. No wonder Romney doesn't want to release his tax returns. They would show that Romney took dividends from several companies that went bankrupt during this period including Stage Stores, Ampad, GS Industries, Dade Behring, DDi and KB Toys. Mitt Romney, the successful businessman, doesn't want you to know how he profited from driving companies bankrupt and destroying jobs. In any event Bain made more than 20 percent of its money in its 1987 to 1995 funds from five companies that borrowed money to pay it dividends or buy back shares that later collapsed.

Since balloon payments on many of the loans that private equity funds had their take-over targets take out are due in the next few years, the eventual collapse of those companies could trigger the next big financial crisis. If Mitt Romney is elected President, it will be just in time to deal with that.

This article relies on the book, "The Buyout of America" by Josh Kosman (sub-title: How Private Equity Will Cause the Next Great Credit Crisis) and the Vanity Fair article, "Where the Money Lives," by Nicholas Saxson.

Flooding the World with Government Issued Fiat Money - Implications for the Dollar as the World's Reserve Currency

by John Lawrence

The American solution to the 2008 financial crisis was flooding the economy with money. There was the TARP, the Troubled Asset Relief Program, a $700 billion bailout of the US' largest banks. But that was only the beginning. Dr. Ben Bernanke at the Federal Reserve bank added another $9 trillion to the money supply with his policy of "quantitative  easing" which is just a euphemism for "printing money." The Fed has printed money again and again. There was a follow-up policy, QE2, because the Fed figured it hadn't printed enough money with QE1. In addition to the US Fed, the European Central Bank (ECB) has been printing money to bail out Greece and other vulnerable European economies. The Central Bank of Japan has also been printing money fast and furiously. Both the US Fed and the ECB are legally prohibited from buying up their country's debts directly, but they can loan money to their big banks and these banks can in turn loan money to the respective countries in an indirect "wink-wink" transaction thus getting around the inconvenient limitations imposed by law. As a consequence another layer of interest accrues to the big banks increasing their power and dominance over the world economy to the point that supposedly sovereign countries have become mere dependencies on them.

What does all this money creation do? First, it supposedly offers a stimulus to economies that are verging on recession. But that is not really happening due to the fact that most of this money is simply being siphoned off by the world's big banks, and, instead of stimulating the economy, is simply going into the financial sector fueling even more speculation and contributing to a possible further meltdown and bailout down the road. In Europe the money is simply going to pay down debts incurred by the various countries. Nothing is being done to spur Greece's economy, for example. Instead the Greeks are being subjected to a regime of austerity - firing workers, reducing pensions and generally creating economic malaise for the average Greek citizen. This will force the Greek economy into a deeper recession with the result that Greek indebtedness will only increase requiring another round of bailouts by the ECB.

Another effect of printing money, sometimes called government "fiat money", since it's not backed by gold or anything else, is the debasement of the currency and inflation. In general the larger the money supply, the more inflation there is. This is not a big concern when an economy is in recession, but becomes a greater concern when the economy starts to "heat up." As far as the debasement of the currency is concerned, the dollar is starting to lose value with respect to other currencies. The more fiat money the government creates, the less the dollar will be worth and this has implications for the dollar as the world's "reserve currency."

Ellen Brown has written extensively about the good aspects of fiat money, namely, Abraham Lincoln's use of it to win the Civil War and build the transcontinental railroad. But all fiat money is not created equal. In Lincoln's day his fiat money went directly into the "real" economy. That is it went to average working people to fight a war and create infrastructure. It avoided having to borrow the money and saved the US government $4 billion in interest. There is a difference in the fiat money that the Fed and the ECB are creating today. Their fiat money is going directly into the financial sector instead of into projects that distribute the money to average citizens and workers. In other words in a perverted downward spiral, today's fiat money is going to pay off the world's big banks like JC Morgan Chase and Goldman Sachs and to pay interest on huge debts owed to private bankers. The Lloyd Blankfeins and the Jamie Diamonds of the world are profiting while the average working person and citizen is only going deeper into debt. The money is not "trickling down", making Republican assertions that all we need to do to get the economy booming again is to give more money to the rich, a ridiculous assertion. The only way to get the economy working again is to give the money directly to the average working person, but this possibility is not even on the radar of the world's western economies like it was during the Great Depression. That is, instead of inserting fiat money into the financial sector resulting in huge profits for bankers and miniscule results for the middle class, the money needs to be inserted into the economy directly at the middle class level which is to say in the form of infrastructure development and support programs like food stamps and tax breaks for the middle class.

The dollar is the world's reserve currency only because the US cut a deal with the middle east oil sheiks that oil on the world market would only be traded in dollars. But here too the dollar is being undercut since some countries, notably China, are cutting direct country to country deals which bypass the world oil market and bypass having to purchase oil in dollars. There are also moves afoot to replace the dollar by a basket of other currencies which would compete with the dollar. All of this is not promising for the continuance of the predominace of the dollar. Increasingly, US Treasuries are becoming less desirable as investment vehicles which means that the money printed by the Federal Reserve is increasingly being used just to buy up the US deficit which is the shortfall between Federal government expenditures and Federal tax revenues. So money is being printed just to bridge the gap. Obviously, this can only be a short term solution to US deficit and fiscal problems. For the long term the US economy itself has to produce tax revenues sufficient to balance government expenditures or, more likely, to pay increasingly higher interest rates to attract private investors just as Greece and Spain are having to do.

So as the US money supply is further diluted by quantitative easing, the value of US money is diminishing, dollar-denominated debt is less desirable as an investment and the role of the US dollar as the world's reserve currency is being eroded. European countries are in a similar predicament having become essentially subsidiaries of US and European banks. One of the statistics that substantiates these assertions is that 93% of the income gains since the Great Recession have gone to the upper 1%. In other words most of the money created has gone to the hedge funds, large banks and other elements of the financial sector. This money has not "trickled down" to the real economy. This is the ultimate denouement of the fact that the western world has relied too much on debt basing their economies. Rather than spending from strength which is spending from savings and accumulated wealth which countries with sovereign wealth funds are able to do, western countries and individuals have overspent by going into debt and the accrued interest is only driving them further into debt. The result is that huge amounts of interest are owed to the big banks, and this amount of money is swamping western economies and debasing the values of the dollar, euro and yen.

In a Trillion Euros Didn't Buy Much Time, Rick Ackerman discusses the fact that the US and Europe have both been reduced to the same level. Their central banks are being forced into the position of bailing out the US and the European countries by buying up their debt since private investors are becoming more and more reluctant to buy it. The US Fed is printing money to make up the difference between US government expenditures and what US taxes and private investors are willing to fund and in the European case, the ECB is buying up Greek and Spanish debt that private investors are turning up their noses at. This buying of debt means that central banks are effectively printing money to pay off the big banks which are owed money that US and European citizens as taxpayers don't have the money to pay and which increasingly cannot be borrowed from private investors.

All this supports my contention that the real action in the world economy these days is not with the average worker/consumer. The average person is becoming increasingly irrelevant. Instead the big banks, hedge funds and central banks are where the action is. In the US the big banks were bailed out while practically nothing was done to bail out the average person. Just think of the foreclosure crisis where HAMP, the Home Affordable Mortgage Program, turned out to be a worthless, toothless approach which did more damage to the average home owner by raising hopes which were later dashed than if it had never been enacted. It did almost nothing to protect home owners from being foreclosed on even though most of the foreclosures were fraudulent. In some cases home owners were led on being promised modified mortgages if they would only keep up current payments only to be foreclosed on at a later date instead of being given the revised mortgages they had been promised. The government's attitude was "we have to let the banks do anything they want, even engage in fraudulent activities, because to do otherwise would risk collapse of the entire system." Ellen Brown's plea for the elimination of the debt based, interest oriented economy in favor of public banking favoring fiat money injected into the real economy instead of into the financialized economy seems further and further from any possibility of being realized.

 

Hedge Fund Gamblers Earn the Same In One Hour As a Middle-Class Household Makes In Over 47 Years

AlterNet / By Les Leopold, April 11, 2011  

How do they make so much money? Where does it come from? How can hedge fund firms with fewer than 100 employees make as much profit as firms with thousands of employees?

We live in a very, very rich country. Yet we seem to be utterly consumed by a collective hysteria that we’re about to go broke. Historians are certain to look back at this period and wonder why the richest country in history consumed itself in a struggle over how many teachers to fire.

How rich are we?

Just take a look at the latest reports on what the top hedge fund managers haul in. In 2010 John Paulson led the list with a record $4.9 billion in personal earnings. That’s a whopping $2.4 million an HOUR. Here’s a factoid to make you wretch: It would take the median US household over 47 years to earn as much as Paulson pocketed in just 60 minutes. And, every hedge fund manager pays a lower tax rate than the average family.

The top 25 hedge fund earners took in $22.07 billion in 2010. Thanks to a generous tax loophole these billionaires will pay a top tax rate of 15 percent instead of 35 percent. Closing that loophole on just those 25 individuals – just 25 guys who wouldn’t miss a penny of it -- would raise $4.4 billion, which is enough to rehire 126,000 laid-off teachers.

Wait a sec. This is America, not Russia. Don’t we want our entrepreneurs to go out there and earn as much as possible? We don’t want to punish the successful who are building up our economy, do we?

Maybe that’s a strong argument when you’re talking about the CEO billionaires of Apple and Google and other successful companies that make products we use. But when it comes to financial billionaires, we don’t even know what they do for a living.

Each and every day I ask people and I get a blank stare or something like: “They invest. They make money.” Sure enough, but how do they make so much money? Where does it come from? How can hedge fund firms with fewer than 100 employees make as much profit as companies like Apple with tens of thousands of employees?

This much we know. They speculate. The place bets. They jump in and out of markets at lightening speeds. They have secret betting formulas just like card counters in Vegas. And as any state attorney general can tell you, a good number of them cheat by betting with illegal insider tips, front-running trades, sneaking in trades after markets close and so on. The entire industry is barely regulated as it plays with a bankroll of $2.2 trillion that comes mostly from enormously rich investors. You can bet the next crisis will bubble out of this vast and murky casino.

I have yet to hear a convincing argument that financial billionaires produce economic value commensurate to what they earn. And if they don’t, that means they are siphoning off the wealth from the rest of our nation. Either we do something about it or we’ll watch our standard of living crumble.

Blah, blah blah. We’ve heard it all before. We know that super-rich financiers are gaming the system. We know they pay low taxes or none at all. We know they’re stashing their cash in offshore accounts. But now that the economy isn’t crashing anymore, it seems there’s nothing we can do about it. We just have to learn to live with a new kind of aristocracy. Get used to it.

Maybe not.

There’s a movement underway for what economist Dean Baker aptly named a “financial speculation tax.” The idea, first put forth by the late James Tobin to raise money to help eradicate global poverty, is to place a very small tax on all financial transactions. Here’s how Baker’s Center for Economic and Policy Research describes it:

The FST (also known as a financial transactions tax or the Robin Hood tax) is a modest set of taxes on Wall Street trading – e.g. 0.25% (1/4 of a percent) on a stock purchase or sale and 0.02% (1/50 of a percent) on the sale or purchase of a future, option, or credit default swap. These rates are proportional to the actual transaction costs in the industry.

An FST would raise over $100 billion per year in badly needed revenue or $1 trillion over the course of a decade.This is a substantial sum of revenue, which skims the fat off of a sector of the economy that can afford to pay it.

The beauty of this kind of tax is that it grabs the financial booty before it lands in the financiers’ pockets. You avoid all the lobbying over loopholes and trying to get back money that someone already has claimed as his or her own. You also avoid the entire argument about whether or not the person has really “earned” it.

By taxing financial speculation in real time, we reclaim some of the ungodly accumulation of speculative wealth in the financial sector. Everyone knows that the financial sector has grown too large for the good of our nation. Everyone knows that its size allows it to play fast and lose with our implicit guarantee of its bets. (Correction: everyone knows but Tim Geithner, who actually believes the financial sector should get even larger so it can provide more speculative services to emerging markets all over the world.) The financial speculation tax is the perfect way to put that money back to work for the common good.

Furthermore, it’s the very best way to make the financial sector pay us back for all the damage it has done to the economy. Before we succumb to financial amnesia we should recall that Wall Street, and it alone, went on a massive gambling spree that crashed the economy and killed 8 million jobs. To save the system from falling into another Great Depression we bailed them out and now they are again making record profits. Meanwhile, long-term unemployment remains at record highs and states are in enormous fiscal distress.

Every American not tied to Wall Street knows that the high-stakes financial gamblers should be paying us back. The speculation tax is the very best way to do it -- grab the money before they stash it in their offshore accounts.

We’re not alone.

Financial transaction taxes are high on the agenda of European nations that seem much less intimidated by their financial barons. The United Kingdom already has such a tax on stock and bond transactions, and there are no adverse effects on its financial center.

On March 8, a coalition of progressives succeeded in getting the European Parliament to endorse this Robin Hood tax by a vote of 529 to 127. This non-binding proposal if enacted would raise approximately $286 billion a year for the European Union. The G20 group of the leading industrial nations is considering such a tax, but the US and its billionaire bankers are fighting hard to keep it off the agenda.

Back in the USA an ad hoc collection of economists are mounting a petition drive to put the issue back on the agenda. It says in part:

The financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken. It is time to fix this link and for the financial sector to give something back to society. …This money is urgently needed to raise revenue for global and domestic public goods such as health, education and water, and to tackle the challenge of climate change.

Needless to say, winning won’t come easy because Wall Street is determined to kill any and all efforts to siphon money away from its casinos. The joke is that when the big boys were on their knees two years ago begging for money, this tax easily could have been a condition for bailing them out. But in truth, the Obama administration is siding with Wall Street and has come up with every lame excuse for why it can’t work, even though it’s working just fine in England.

Clearly, we need our own Robin Hood movement like the one organized in Europe that delivered more than 500,000 petitions to the European Parliament. And that in turn requires we develop the will to fight Wall Street.

Each time I write about these issues, my editors worry that you, the readers, have given up -- that nobody believes it’s possible to fight Wall Street and win.

Well, I’m not giving up on you.

Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It (Chelsea Green, 2009).