Letter 2 America for February 21, 2014

Dear America,

I have been talking lately about ways in which we can alleviate the profound migration of wealth from the pockets of the population at large to those of the select few who get their initial wealth from their parents and boards of directors.  Another means by which wealth is relocated has been the financial industry, and in particular, the derivatives markets have been prominent.  Our current economic malaise is a function of the damage done five and more years ago by the perversion of the mortgage securities market, that is the trade in mortgages by those who can afford to buy them, from a pure financing enterprise for home buyers to a giant bingo game in which the lucky few make fortunes not just by financing home ownership, but by betting on who will be able to pay his mortgage through the purchase and sale of derivatives like "credit default swaps."  Swaps are not mortgage financing per se, but rather are promises to pay off the mortgages of those who cannot pay...a kind of insurance for financiers.  But in addition to those swaps there are several other kinds of derivatives that amount to nothing but wagers.  In fact, you may remember J.P. Morgan's payment of billions of dollars as a fine for its behavior in the derivatives market through an employee of theirs known worldwide as the "London Whale."  And J.P. Morgan just payed $14 billion in fines for their dishonest representations to investors who bought "mortgage backed securities" from them.  What they did was bundle mortgages in groups, which they rated for soundness, and then sold pieces of those groups of mortgages...tranches, they were called...to unwary investors, who then took a bath when the housing market crashed.  The fine was for the ratings they assigned, which turned out to be inaccurate in ways that favored the bank's profitability in that bad investments could then be sold at a premium...an undeserved premium, that is.  So, as I have said before, the profits from this kind of financial manipulation is barely more than ill-gotten gain, and the rationale for taxing them at lower rates than regular income doesn't exist.  We have begun--through our tax laws and by other means--to extol the acquisition of what used to be known as filthy lucre, and that isn't the equivalent of encouraging hard work and dedication as means to prosperity.  The way to address the problem is at least bifurcated.

First, we should insist that the Republican Party get out of the way of implementation of what is known as The Volcker Rule within the Dodd-Frank Act.  That rule segregates the speculative activities of "investment banks" like J.P. Morgan from the legitimate borrowing and lending activities of your local savings bank.  Investment banks cannot be under the same corporate umbrella as commercial banks like your local lender under the Volcker Rule, and that is how it should be...and how it was before the Glass-Steagal Act was repealed during the Clinton administration.  Incidentally, Larry Summers, President Obama's first choice for the chairmanship of the Federal Reserve, was the one who advised President Clinton to sign the Republican bill that effected the repeal, which passed in a Republican controlled legislature under the aegis of Speaker Newt Gingrich and his "Contract with America."  I still wonder who old Newt thinks America is.  The regulations directed at the problem of enforcing the separation have been impeded, and now diluted, but the Republicans in congress, and they should be exposed for their efforts on behalf of all the wrong people.  Second, we should insist that the tax reform that the Republicans have been claiming to favor, but which seems never to happen as a consequence of their outright control of The House of Representatives and their de facto, filibuster-enabled control of The Senate.  If the capital gains tax break that was built into the federal income tax statutes during the Reagan administration were eliminated, at least as it applies to speculation income, that would go a long way toward discouraging speculation in derivatives, the profits from which should be taxed at a higher rate than earned income in my opinion, not a lower one.  After all, is hard work the American way or is it easy money made by having money.  We are the putative land of opportunity, where hard work and talent are the road to riches, so why don't we reward those things in our tax policy rather than encouraging the rapacious acquisition of unseemly wealth by dubious means.

Of course, changes in tax policy will not be enough to relocate the money purloined by the wealthy from our economy as a whole.  Now that the jobs of those who choose not to go to college have gone abroad, there aren't too many opportunities left in this country...at least not enough for all of the people walking around with college degrees that they can't do anything with.  There is always talk about the 3% unemployment rate of college graduates compared to the 10% suffered by those without high school diplomas and the 7% of this with them.  But the fact is that many of those "employed" college graduates aren't doing jobs that might be associated with college education, like the law school graduate supporting himself waiting tables in a pizza parlor, which is not just a piece of apocrypha that I cite for my own purposes.  Nor is the lineman's apprentice, who makes good money on his job, but who isn't exactly doing the kind of work that requires a college diploma in philosophy.  As to the former, I saw him on the news, but as to the latter, he just moved into his own apartment after 24 years of living in our house.

As to some of those other means of addressing the problem of wealth distribution, at least one of them is under discussion right now among the "gang of three," which comprises the heads of state of the three countries in North America.  Problems with NAFTA (North American Free Trade Agreement), another gift of the Clinton administration, are causing criticism of the contemplated extension of its terms, and President Obama seems to be given pause by the debate between business and everyone else over what's good for the country...and over who the country actually is.  That discussion, which has much in common with the debate over the Keystone XL pipeline, is the next topic of our discussion regarding leveling the wealth disparity in this country.

Your friend,

Mike