There's a widening wealth gap in America. It took a generation, but the middle class in this country has been hollowed out.
Most people agree on that.
But they don't really know how it happened or who's really to blame - it's been obscured with false narratives, covered with "fake news."
The thing is, the truth's in front of us. We're living it in real time. It's just never discussed openly - for a reason.
The people who are behind this catastrophic American collapse have fooled folks into thinking this is all normal.
Well, it's anything but that...
Who to Blame for the Disappearing Middle Class
Republicans aren't to blame: Their old-school platform of a smaller federal government, fiscal conservatism, more power to the states, and belief that a lightly regulated path to working hard and standing on your own two feet is what made America the global bastion of entrepreneurship and helped create a middle class that is laudable and fair.
Democrats aren't to blame: Their old-school platform of a larger, more interventionist federal government, spending on social programs, supporting and safeguarding workers, all kinds of civil rights, protections for the environment, and their belief that government should stand behind those not able to stand on their own two feet, or who have been trampled by runaway businesses, helped create a middle class that is equally laudable and fair.
The two parties, with their visions and flaws balanced by democracy, made America great... once.
What happened is greedy, neo-con, profiteering Republican crony capitalists hijacked their party, while greedy, limousine liberal, profiteering Democrat crony capitalists hijacked their party. Together, as a new class of elites joined the Masters of the Universe, they began manipulating state apparatuses and banking for fun and profit...
A lot of profit.
The crony capitalists' principal enrichment tools are "financialization" and, as we'll see a little later this week, its manservant, "globalization."
Financialization is the retooling of the economy's production and distribution assets, consisting of made-in-America goods and services, into credit-driven banking and financial services products.
At its core, financialization is the transfer of low-risk, low-profit debt into high-risk, high-profit products.
The net result of the mass commodification of debt-based financial instruments and leveraged debt (grossly under-collateralized by low-risk debt) is rampant speculation.
This heavy betting, however, isn't undertaken just for the sake of pyramiding risks for speculative gains. These so-called "products" are now integral and necessary investment tools because traditional, safe investments don't yield adequate returns in the world of financialization.
According to the U.S. Bureau of Economic Analysis (BEA), in 1980, financial services contributed 4.9% to the country's GDP. At its peak in 2006, that contribution had almost doubled to 8.3%.
More to the point, in terms of profitability, James Kwak, law professor at the University of Connecticut, calculated in 1980 the financial industry's profits as a share of total U.S. business profits was 7.5%. That share of all business profits in corporate America jumped to more than 41% by the mid-2000s.
U.S. GDP in 2016 was $18.56 trillion, according to the BEA. In full view of financial services' share of GDP (which is rising again) and its share of corporate profits (also on the march to new highs), it's impossible not to see the financialization of the U.S. economy.
Worse, it's actually become the beating black heart of the economy. It's happening that way by design...
How the Financialization Scam Became Settled Public Policy
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The road to financialization began with the overturning of longstanding public and economic protections, starting with the Depository Institutions Deregulation and Monetary Control Act of 1980, a Trojan horse that let banks establish holding companies and gave the Fed more power over more banks.
That major deregulatory action was followed quickly by the Garn-St. Germain Depository Institutions Act of 1982, which leveled the playing field for banks and their holding companies experiencing competitive disintermediation and decreasing profitability.
Ultimately, a series of subsequent rules- and regulations-trimming by banks' congressional cronies culminated in the Gramm-Leach-Bliley Act of 1999, whose main function was the total repeal of the Depression-era Glass-Steagall Act that had for decades separated insured, deposit-taking commercial banks from swashbuckling investment banks.
That's how elitist Democrats and Republicans paved a super highway for the financialization of the American economy and their enrichment from the country's transformation.
So who were the Republican and Democratic politicians behind the wholesale transformation of America, and where are they now?
You'd be shocked at how many of them you know as senators, House members, cabinet secretaries, principal regulators... Supposed stalwart guardians of American prosperity who've become filthy rich at the expense of the middle class, on whose backs and from whose labor and savings they've enriched themselves (and their reelection war chests). I've written thousands of pages in Insights and Indictments naming names and calling these sellouts what they really are: crony capitalist pigs.
The proof is in the pudding.
Actually, make that pooling.
Without financialization, we never would have had the subprime mortgage crisis and the market and financial system crashes.
I'll show you how.
Home mortgages used to originate "locally," with banks, thrifts, and credit unions that knew their communities, as well as the value of properties and creditworthiness of borrowers in those communities. Mortgage loans mostly stayed on the books of lending institutions until maturity or until properties were sold.
That was great for stability and fairness, and making sure things remain sustainable... but the trouble was, no one got filthy stinkin' rich on it...
Financialization, with its cheap come-on capital, its dodgy pooling techniques, its structuring, its tranches, derivatives and synthetic derivatives of derivatives, turned a utility service into a speculative pyramid of leveraged loans that looked and acted more like a Ponzi scheme than the sophisticated, high-yielding, safe (a lot of them packaged with government approval and guarantees) financial instruments they were made out to be by rating agency co-conspirators.
We all know how that ended.
Thing is, it didn't actually end there. How could it have? As horrific as the financial crisis was, as much wealth was vaporized, there was still lots more blood to drain from the middle and working classes - and their children.
A Bad Idea Gets Much, Much Worse
That bloodletting comes in the pooling of student loan debt. If anything, it's even more sickening than the financialization of mortgage debt.
As if leveraging the living daylights out of the American dream of home ownership wasn't enough, the financial vampires of the political class saw an opportunity in that other great American dream: higher education - the burning desire of people to better their lot and improve their wages and prospects at colleges and universities.
What happened to professors', administrators', state schools', and private schools' goals of helping Americans get a higher education for the fair wages they earned and the balanced budgets they hoped to achieve?
They got greedy. They're all in the big for-profit game now, thanks to financialization.
Hopeful students are suckered into cheap loans which are, of course, pooled, leveraged, sliced, diced, and sold to investors. The cash those investors fork over can be used to make more loans, to pyramid (or Ponzi, if you choose) students' hopes and dreams that a higher education means a higher standard of living.
And if those loans are in arrears, in default, and don't get paid back - hey - investors don't have to worry.
The government, which is to say crony capitalist congressmen and women, have fixed that potentially profit-leaking hole.
You see, making student debtors "low risk" by having the state guarantee payment of interest and principal to investors - while extracting more payment from grossly indebted students (plenty of whom never graduate), no matter the cost or the poverty level of those beleaguered, unemployed, underemployed, and generally struggling indebted borrowers - means that more loans can be pushed like dope to the uninitiated who have no idea about the trap they're being lured into.
And as for the neo-liberal educators and liberal arts universities who want more kids - customers - to get a better education, they're making hundreds of thousands of dollars in salaries and tens of millions of profits every year.
That's financialization at work.
It's not at work alone. Later this week in my Insights & Indictments service, I'm going to show you how globalization is taking these crony capitalist schemes big time, as in, worldwide, trapping billions in a state of permanent poverty. Click here to get my update as soon as it's released, and you'll get all of my Insights & Indictments research, too - free.
Together, we'll play the crony capitalists' game while working to destroy it.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.