July 5, 2018–If you believe the Trump Administration, the media, and some pundits, the U.S. economy is in the midst of a never-ending recovery, best demonstrated by the continuing rise of the financial markets. But if you peer just beneath the surface, something entirely opposite emerges: we are in the midst of yet another unsustainable financial bubble, like that of the 2000 dot.com or the 2008 mortgage-fed derivatives bubble, driven by Wall Street parasites and their enablers. The only issue is, when will the music stop?
New York City’s “Billionaires’ Row”–It’s not the real story.
The brutal contradiction gripping the economy is the near-hyperbolic rise in stock buybacks and corporate and related debt, contrasted with the ongoing stagnation in living standards and wages, and the increasing income inequality manifest throughout the country. The dichotomy of wealth is severely underscored by the archaic condition of the nation’s infrastructure. This article will focus on an area of the country that dramatically juxtaposes the two: New York City.
As CNBC stated truthfully, for a change, on July 2, it is only the ongoing stock buybacks that are keeping the wildly inflated financial markets afloat, for however much longer.
The Parasite in Action
Keeping the stock market afloat
The truth of the buybacks has emerged out of the shadows of the mainstream media. According to CNBC, “Companies buying back their own shares is the only thing keeping the stock market afloat right now.” They reported that:
Companies set a record for share buybacks in the second quarter, while investors set their own record for selling stock-based funds in June.
On the corporate side, officials are finding that repurchases are the best use for investor cash now, while individual investors are fearful that a trade war could offset strong economic momentum this year.
All in all, the corporate buying has won out, keeping the S&P 500 slightly positive for the year….
Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record.
“Both sides are motivated by fear, as corporations find little else to do with their $2.1 trillion in cash than buy back their own shares or make deals, while individual investors head to the sidelines amid fears that a global trade war could thwart the substantial momentum the U.S. economy has seen this year.
QE4
This is precisely what JPMorgan Chase’s CEO Jamie Dimon correctly identified as QE4 in December 2017. Since when is our country sold to the highest bidder, while the rest of the country is being ripped off and looted? The fish stinks from the head. The Wall Street bank behemoths, too big to fail, or jail, are driving the buyback feeding frenzy, buying their own shares and loaning to corporate America to buy theirs as well.
On June 29, Pam Martens, writing in her authoritative publication Wall Street on Parade, said:
The U.S. Federal Reserve, the country’s central bank that is supposed to serve the interests of the nation, gave the largest Wall Street banks a big, irresponsible gift yesterday. The big banks will now be able to spend approximately $170 billion buying back their own stock and paying out increased dividends to shareholders instead of doing what banks are supposed to do: make loans to worthy businesses to stimulate the U.S. economy. But don’t expect to find that critical news on the front page of your local newspaper.
According to the Federal Reserve’s announcement yesterday, under its stress test known as the Comprehensive Capital Analysis and Review (CCAR), the biggest Wall Street banks will be able to dramatically expand a technique of manipulating their own share price through share buybacks and richer dividend payout.
The Wall Street bull
Will the Fed stave off another crash?
On June 27 Martens had written an expansive critique of the Federal Reserve’s malfeasance with the major banks in their voracious buyback operations and their absolute refusal to channel investment into the real economy.
Stock buybacks by the mega banks have come under intense criticism. On July 31 of last year, Thomas Hoenig, the Vice Chair of the Federal Deposit Insurance Corporation (FDIC) that backstops with Federal insurance the trillions of dollars in deposits held by these mega banks, sent a warning letter about buybacks to the Chair and Ranking Member of the U.S. Senate Banking Committee.
Hoenig stated in his letter that the ten largest banks in the country “will distribute, in aggregate, 99 percent of their net income on an annualized basis,” by buying back excessive amounts of their own stock and paying dividends to their shareholders. Hoenig said that if those 10 banks had retained a larger share of the earnings they earmarked for dividends and share buybacks in 2017, they would have been able “to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.
Warnings Abound of the Looming Debacle
In a further attack on the malicious nature of the buyback syndrome, Steven Pearlstein, a Pulitzer Prize-winning business and economics columnist at the Washington Post, sent a shot across the bow with a full-page attack on the insanity of the buyback mania. As americansystemnow.com reported June 12, his June 8th article lambasted both the destruction of any growth potential in the economy and the absolute insanity of the resulting eviscerating bubble.
Pearlstein outlined the problem as follows:
Last year, public companies spent more than $800 billion buying back their own shares and, thanks to all the cash freed up by the recent tax bill, Goldman Sachs estimates that share buybacks will surge to $1.2 trillion this year. That comes at a time when share prices are at an all-time high — so companies are buying at the top — and when a growing global economy offers the best opportunity to expand into new products and new markets. This is nothing short of corporate malpractice…
The most significant and troubling aspect of this buyback boom, however, is that despite record corporate profits and cash flow, at least a third of the shares are being repurchased with borrowed money, bringing the corporate debt to an all-time high, not only in an absolute sense but also in relation to profits, assets and the overall size of the economy…
A decade ago, in 2008, there was $2.8 trillion in outstanding bonds from U.S. corporations. Today, its $5.3 trillion, after the record $1.7 trillion of new bonds issued last year, according to Dealogic, and $500 billion more issued this year.
Thomas Hoenig, former vice-chair of the FDIC (FDIC)
Pearlstein warns that much of this corporate debt is landing in ETFs, a popular retail product for mom and pop investors, who may decide to flee if things go south. The debt is also landing in Collateralized Loan Obligations (CLOs) which Pearlstein correctly compares to the subprime mortgage securitizations that blew up in the 2008 financial crisis.
The upshot of all of this, says Pearlstein, is that “Corporate America, in effect, has transformed itself into one giant leveraged buyout.”
The Host Economy is Dying
While the corporate buybacks rise, the physical economy is falling. This is even reflected in official statistics, although a look at the actual physical conditions of life of the average American makes the contrast even sharper.
Some Troubling Numbers
According to Eric Shaal of Cheat Sheet on June 28, “we are seeing the poorest spending increase in 5 years. While consumer spending typically drops in the beginning of the year, Commerce data showed it plunging from a 4% growth rate in the fourth quarter to 0.9% in the first three months of 2018. That type of growth is the worst seen since April-June 2013, Reuters reported.”
“The weak domestic demand created $6.3 billion less in warehouse inventories than the government first estimated, the data showed. Meanwhile, capital spending has not followed the narrative GOP tax plan proponents pushed ahead of the bill passing. (Most of that money has gone to stock buybacks.)”
Jobless claims jumped higher than expected in mid June 2018.
Gas prices keep rising.
In addition to the news on lower consumer spending, applications for unemployment benefits rose by 9,000 claims in the week ending June 23. That put the figure at 227,000 (seasonally adjusted).
However, the poor performance in the first quarter will likely keep GDP growth for the year at or below 3%
The weak consumer spending results matches up with Trump administration data on wage growth through May 2018. Overall, nearly four fifths (80%) of private-sector employees saw their take-home income drop in the past year.
That bad news applied to workers in manufacturing, production, and other non-supervisory jobs (including fast-food workers and cashiers). Inflation, which has grown faster than actual wages, continues to hold most Americans’ income down in 2018. Higher oil prices–resulting in higher gasoline costs–will keep that trend going.
A May 30 article in Market Watch reported that “The U.S. economy grew a mild 2.2% in the first three months of 2018, revised government figures show.” The numbers: The U.S. economy grew a touch softer in the first quarter than originally reported, mainly because of a slower buildup in inventories. Gross domestic product was trimmed to an annual 2.2% pace from 2.3%.
The reality is getting worse by the day. Productivity continues to limp along at around 1% per year, and wages are not only not rising, but falling in many categories. Plus if you factor in the drug epidemic, many decent well-paying jobs are going unfilled as nobody in the community can pass a drug test.
The Case of Bristol, Virginia
On June 30, the Washington Post captured the underlying nightmare in a full-page report on the collapse of Bristol, Virginia. Bristol, a town of 17,000 on the Virginia-Tennessee border, was once a thriving railroad and manufacturing center; now it is in a state of utter disintegration. The exodus of the manufacturing base, coupled with the downsizing of the nearby coal industry, has resulted in near pandemonium.
Twenty-five percent of the city’s population is now officially at or below the poverty level; 42% receive some type of government assistance each month. Because over 80% of the school children qualify for aid, the schools serve free lunches to the entire educational system.
The abandoned Bristol train station, now a tourist haunt.
On top of that, the city is swimming in debt and has had to renege on millions of dollars of debt payments. Despite continuous budget cutting and downsizing, the city is still facing annual shortfalls in paying its debt service.
Needless to say, this has become the perfect breeding ground for the drug epidemic. Because of the drug crisis, the city jail, built to house 67 inmates, reported 240 prisoners in March of this year. In order to deal with this, the city has been forced to send 100 prisoners to a regional holding facility, at the cost of $38 per inmate per day. Meanwhile the city jail is at double capacity.
Were the federal government, in concert with a rigorously oriented banking system, funneling investment into industry and infrastructure, this crisis would not be happening. But then again the parasites would not be themselves.
A Hollowed-Out New York City
As our attention has focused on New York’s Wall Street, let’s take a closer look at how this Wall Street culture has impacted the city overall, and the lives of the average person. Have the fantastic gains of Wall Street helped those living on Main Street in the nation’s premier city?
A devastating exposé in the July edition of Harper’s magazine entitled “The Death of a Once Great City,” tells the tale. It details how the “public” city has been destroyed since its “golden age” from 1945-1963. Behind the sheen of the glass-gated communities and gentrification, are poverty, homelessness, a dangerously crumbling subway system, and rotted-out bridges. The article forces us to take a closer look at the damage from financial deregulation, real estate speculation, and privatization. Although I urge everyone to read the entire article, I will quote from a few key sections, to underscore the cause-effect results of our current government policies to protect the wealthy at the expense of the rest of us.
New Yorkers, over time, made just about anything and everything, from chemicals to bread, metal parts to chocolates, furniture to crates for shipping fine art, toys, and clothes of every description. Moreover, as the busiest harbor in the world for most of a century, it moved things. These industries were constantly in flux, and by the end of World War II, as the only great world city that remained unbloodied and unbowed, New York still had more than a million manufacturing jobs, more than any other city on the planet.
A subway derailment in New York City
These numbers declined slowly at first, then more rapidly, with about half of the old manufacturing base gone by the Seventies. Deindustrialization continued rapidly in the Eighties, until today there are estimated to be fewer than 80,000 manufacturing jobs, in 6,000 companies. Some of the last and most integral parts of the city’s working culture are now finally fading away altogether. The Meatpacking District is a euphemism for drunken club-hopping and shopping. The Garment District, caught between Madison Square Garden and the Hudson Yards excrescence, is dissolving into still more trendy bars and restaurants. The rag trade, so instrumental in shaping the very nature of New York, has been steadily pulled overseas for years. The same thing has happened to the makers of clothing throughout America. The advent of container ships would have spelled the end of New York’s hundreds of miles of working waterfront and the tens of thousands of jobs it provided no matter how much the city tried to keep them. For a generation, the piers rotted down to the pilings, while the waterfront crumbled into a drugs and sex bazaar. Things change, people go. Favorite stores and bars close. The owner of that deli you love gets tired of carving cold cuts all day and decides to retire to Florida. So what?
The FDR Years
The Harpers article usefully contrasts the current situation with New York City’s FDR years. “A little-noticed but quietly magnificent exhibition at Hunter College’s Roosevelt House Public Policy Institute this past year, “The New Deal in New York City”—part of the nationwide Living New Deal history project—put on display a vision for another way of life, a way of life that Mayor La Guardia was instrumental in building. The exhibit featured images of the first public housing in the United States, built by New York City from 1935 to 1937 with funds provided by the Federal Works Progress Administration and Public Works Administration.”
These projects—the First Houses, Ten Eyck (now Williamsburg) Houses, and Harlem River Houses—were built on a human scale, just four to five stories high. At First Houses, the spaces formerly occupied by one out of every three of the rotting tenements they replaced were left vacant, to let in air and light and provide room for children’s playgrounds and places where their parents could sit and talk. The buildings were small, and they, too, were no utopia—though they remain much-sought-after homes to this day. By 1941, according to the exhibit, a total of nine such projects had been built in New York, with 11,570 units, and more than 500 of these developments had gone up around the United States.
Unlike so much later public housing, they were not envisioned or designed as projects simply to store the poor but as integral parts of a new community. Their residents could take advantage of any number of other government-funded community projects all around them, from beautiful new swimming pools to refurbished—and free—schools and colleges. They could find work rebuilding their own city’s infrastructure or writing guidebooks to New York. They could attend plays and concerts of all sorts.
The decline of the subways is just the latest diminution of public life in New York. Over the past few decades, what used to be regarded as inviolable public space has been systematically rolled up and surrendered to unelected private authorities. Starting with Central Park in 1980, much of New York’s park system has been handed over to privately funded “conservancies,” supposedly subordinate to the city government but in truth all-powerful, and quite determined to put everything on a paying basis. A visit to the Central Park Zoo, once free, now costs $18 per adult, $13 per child. A “total experience” ticket for the world-renowned Bronx Zoo costs $36.95 for all “adults” over the age of twelve, $26.95 for younger children, and $31.95 for seniors—in a borough where the median yearly household income is $37,525. (Rental of a single-seat stroller at the zoo will cost you $10. A wheelchair is free but requires a $20 deposit, lest you try to scoot off with it.)
The First Houses built in New York City during the Depression.
In the success story that New York is considered today, the situation is just as perverse: the rents are driving people and commerce away, but some of the tallest residential towers ever built sit all but empty. The cause is once again a flood of outsiders, though this time they are not poor but among the richest people in the world. They have already proved themselves more destructive to the health of the city than the least-skilled poor, and their depredations will do incalculably more damage to New York over the decades and even the centuries ahead.
In the brutally Darwinian world of the poor, they usually got jobs, started families, became useful and productive citizens, or failed and were pushed back out of New York—back home or to another place—or ended up incarcerated or even dead. The rich, though, are with us always, and now for the first time as a purely rapacious force, consuming the city’s most valuable assets and contributing almost nothing in return. “If we could get every billionaire around the world to move here, it would be a godsend,” Bloomberg, the city’s billionaire mayor, said in a moment of typical frankness back in 2013. But these are not your grandfather’s billionaires.
Time to Extirpate the Parasite
Without detailing more from the Harper’s article, I want to emphasize its damning conclusion:
More disturbing than any potential fiscal or physical collapse, though, is the moral collapse that New York has suffered. “Too often, life in New York is merely a squalid succession of days, whereas in fact it can be a great, living, thrilling adventure,” Fiorello La Guardia told New Yorkers during his 1933 mayoral campaign. Today, life in New York too often seems like a sci-fi version of itself in which we barely notice as our fellow human beings are picked off by the monsters living among us.
Yes, the rich will be with us always. But New York should be a city of workers and eccentrics as well as visionaries and billionaires; a place of schoolteachers and garbage-men and janitors, or people who wear buttons reading is it fascism yet?—as one woman in my neighborhood has for decades, even as she grows steadily grayer and more stooped. A city of people who sell books on the street—and in their own shops. A city of street photographers, and immigrant vendors, and bus drivers with attitudes, and even driven businessmen and hedge fund operators. All helped to get along a little better, out of gratitude for all that they do to keep everything running, and to keep New York remarkable.
Instead, our leaders seem hopelessly invested in importing a race of supermen for the supercity, living high above the clouds. Jetting about the world so swiftly and silently, they are barely visible. A city of glass houses where no one’s ever home. A city of tourists. An empty city.
A Clear Solution
One can clearly see how our beloved country over a period of 50 years has become occupied by a group of interlopers who only care about their own wealth at the expense of the rest of us. For most Americans the glass is more than half empty.
The good news is that a solution is readily at hand. If the Congress would reverse the current policy of deregulation, and re-implement Glass-Steagall, while providing a new source of credit through a new National Infrastructure Bank or national bank, investment can once again begin to flow into the real economy. Plans for revitalizing New York City through infrastructure projects like Gateway are already ready to go, not to mention the proposals for a nationwide infrastructure revolution with a maglev network and nuclear power, among other projects. The hundreds of billions of dollars going into speculation (buybacks) can be directed to improving the living standards for the nation, and our posterity.
The Triborough bridge,, built under FDR. New infrastructure can be built with Federal credit today.
The very lifeblood of our country is at stake. Can there be any doubt as to why unprecedented political upsets are now underway? With the old guard being moved out, and the new in, it may be our last chance to return to a government that protects everyone, not just the rich. It’s time to reinstate those policies that worked in the past and will bring our nation back to its golden age. Only by doing so will we prove that America is, indeed, fit to survive.
