Image by Eric Brehm.
The Musk and Trump cuts to government programs are part of a larger movement towards ‘free markets’ began a little over fifty years ago when we abandoned fixed exchange rates (rates set by the government) in favor of floating exchange rates (the Float). In other words, the government past the decision making for determining the rate of exchange between two currencies to the market (those buying and selling currencies).
The Float was a watershed moment. It began a shift away from government in favor of business and letting the market sort it out. This coup was a victory for the Johnny Appleseed of free markets, Milton Friedman. The Friedman Doctrine held that business had no social responsibly except to maximize profits.[1] He felt government programs initiated by FDR to help the average American, such as the minimum wage and Social Security were wrong.[2]
Labor who had benefitted from New Deal programs like the Wagner Act saw their power begin to wane; while business gained. Conservative and pro-business groups like the United States Chamber of Commerce began advocating for market-based solutions, arguing government regulations and taxation were business impediments.[3]
When Reagan was elected he became the voice for the market movement saying, “government is the problem.”[4] He cut taxes and plunged America deeper into the red.[5]
Sometime in the 1980’s monetary policy triumphed over fiscal policy. Fiscal policy (spending, tax rates,…) is the domain of elected officials. Monetary policy is conducted by the Federal Reserve (Fed) run by an unelected bureaucrat whose governing board consists of big banks. The market was now in control, money had toppled democracy.
The Fed became the bagman for the market movement. While the Fed focuses on price stability and the economy it made protecting financial markets tantamount. So when stocks crashed in 1987 the Fed came to the rescue and bailed out the stock market; a policy it continues. Stock valuations surged—measures such as the PE ratio of stocks has on average been higher since 1987.[6] The rich, through no action of their own, got richer.
To understand this take the Price Earnings Ratio (PE) of a stock. If a stock is earning a $1 per share and has a PE of 10 its price would be $10 (10 X $1). If the PE goes to 15 its price would increase to $15 (15 X $1) Basically the Fed had the effect of levitating stock prices. Meanwhile, the Fed ignored the surge in Fringe Banking—Payday Loans, Rent-to-own…–and the poor suffered.
Rising financial asset valuations were a boon for the rich to fund think tanks, ballot initiatives, payoff politicians and more.
It can be difficult to accept that the Fed has become the power source for our country, but one need only look to how money has corrupted and taken control of politics and just about everything else. This is why I protested by the Fed in the early 2000’s.
Looking at unions as a surrogate for labor, union density in the 1950’s and 1960’s hovered around 30%.[7] In the forty years between 1983 and 2022 union membership halved from 20.1% to 10.1% of workers.[8]
When unions had their peak influence on the economy several felt they were abusing their power, pointing to actions such as featherbedding. In 1963 featherbedding cost railroad carriers $592 million compared to industry earnings of $681 million.[9] At the time light bulb jokes were popular and unions would be ridiculed for their mischief. For example, ‘how may union members does it take to change a light bulb?
Three, one to carry the ladder, one to carry the light bulb and one screw it in. Or four, add a ladder holder. Or…
With the market having ascended to power,[10] has it, like labor fifty years ago, abused its power? To answer that we turn the Financial Services Industry, or what is classified as Finance and Insurance (FI). So, how many stockbrokers does it take to change a lightbulb?
FI serves a unique role. It channels money from savers to borrowers to facilitate the economy; savers are paid for providing capital for businesses to grow. It also acts as conduit for the Fed to conduct its open market operations, a key component of monetary policy. Meaning the Fed buys and sells government bonds through FI; in a way giving FI first dibs on the money it puts in the economy—
or takes out. Technically the Fed acts through banks, but the separation of banking from other financial services ended long ago and was formalized with the passage of the Financial Services Modernization Act of 1999 that allowed for the merging of banking, brokerage and insurance.
While FI is not directly responsible for the economy it is intimately tied to it because of its responsibilities; to facilitate the Fed’s policies and act as a financial intermediary. Arguably, its end product is the economy, or GDP (Gross Domestic Product, the dollar value of the overall economy). So, how much are we paying FI to generate economic growth?
By looking at the GDP contribution of FI relative to GDP, FI/GDP, over time we can get an approximation of FI’s efficiency. In 1972 the year before the Float began FI accounted for 4.2% of GDP[11], by 2023 it accounted for 7.2 % of GDP.[12] Meaning it took an additional 3% (7.2 % – 4.2%) of GDP in 2023 to get the same relative economic output (GDP) we had in 1972. There was a financial featherbedding of sorts.
The value of 3% of GDP in 2023 was $831B (.03% X ($27,720.7T). Let’s not forget this has been going on for over fifty years since the Float began in 1973, to the tune of trillions of dollars.
What makes this take even more egregious is that productivity for the economy overall improved 43% since 1972.[13] Had FI performed commensurately its GDP contribution would have fallen to 2.9% (4.2%/1.143%) for a savings of $360B ((4.2%-2.9 %)X ($27,720.7T) in 2023. Combining the lost productivity gains with the 3% increase in FI since 1972, arguably 4.3% of our economy was redundant in 2023.
The surge in transactions was because of financialization—the process of converting business, government and even personal assets into financial instruments. Through securitization existing securities were churned into new securities, loans were bundled and turned into tradeable securities…Privatization saw government assets turned into tradeable financial assets. New financial markets such as currency trading and derivatives opened up. Derivative securities (leveraged securities whose value is based on another security), almost nonexistent prior to the Float, had an estimated notional value (the face value of the underlying instrument it is derived from) globally of $715 Trillion (6/23 BIS).[14] This is for OTC derivatives and does not include exchange traded ones.
Look at it this way, the Spanish needed large galleons to haul all their ill-gotten booty from the Americas back home—today we have privatization, securitization…and electronic transfer.
There is more. The Fed’s easy money and deregulation has made financial engineering a profitable business strategy. Private Equity (Leveraged Buyouts) accounted for 6.% of GDP in 2022[15]. PE restructures and does not make anything new; and does so painfully as Oliver Stone showed us in Wall Street. Gretchen Morgenson and Joshua Rosner in their book, They Are the Plunderers, exposed the behavior of PE, calling it a money spinning machine…that created little value for society and thinned our country’s social fabric.[16]
Share buybacks by corporations used to be illegal because it was considered price manipulation. Thanks to the magic of deregulation it became legal in 1982. By 2021 share buybacks were valued at about 2.9% of GDP.[17]
Quantifying the extent of corporate financial engineering is next to impossible. We can however gauge the portfolio income(investments) of corporations. In 2021 it was about 1.1% of GDP. [18] Undoubtedly, this understates the extent of corporate financial engineering. We need only to look to General Electric (GE Finance), General Motors (Ally Finance) and Sears (Discover) to see how significant financial engineering can be to a company’s profitability.
Adding it all together 14.8% (4.3% + 6.5% +2.9% + 1.1%) ($4.1T in 2023) of our economy consists of some form of financial engineering, much of it a paper mirage.
The market, the flagship of capitalism, is predicated on a lie—it is not the best arbiter for decision-making, nor is it efficient. So when you hear the bellyaching and demonizing of welfare queens, the evils of regulation, how bloated and inefficient the government is, or the bogeyman of socialism…don’t take the bait, the speaker is trying to divert your attention from something; usually the looting of government—a tax cut, corporate perks…
Musk and Trump’s crying about government inefficiency means something else is afoot.
Realize the market has a face that reaches into many of our country’s cities and towns. It includes: financial advisors, stockbrokers, hedge funds, bankers, private bankers, money managers, traders, CTAs, CFA`s, private equity firms, investment bankers, institutional salespeople, investment consultants and more. They need to be told the market is a fraud and to stop ripping us off.
So, how many stockbrokers does it take to change a lightbulb?
It has to be in the hundreds, if not thousands, or more. We are talking trillions of dollars in 2023. All those markets, each with their own fiefdom. All those grubby hands, each taking a cut of the action creating one humongous inefficient and self-serving bureaucracy, we call ‘the market.’
Consider. One to screw the light bulb in, another to underwrite a stock on the endeavor, a team to do the due diligence necessary to issue the stock, someone to trade the stock, a retail stockbroker and an institutional salesperson to promote the stock, a fund manager to buy the stock, someone to separate the stock dividend from the stock and sell them as separate securities, …Then there is compliance, legal, the back office…
Cannot forgot all those other financial products—bonds, futures, options, currencies, swaps, ETF’s, commodities…
Madis Senner is a former global bond manager. His latest book is Everything Has Karma. https://motherearthprayers.blogspot.com
1. ‘A Friedman doctrine‐- The Social Responsibility of Business Is to Increase Its Profits,’ Milton Friedman, NY Sept. 13, 1970 ↑
2. Capitalism and Freedom, Milton Friedman, Fortieth Anniversary Edition, Page 35. ↑
3. Heather Cox Richardson, Democracy Awakening, Pages 45-46. ↑
4. 1981 Inaugural address. https://www.reaganlibrary.gov/archives/speech/inaugural-address-1981 ↑
5. https://www.ushistory.org/us/59b.asp?srsltid=AfmBOorcvHhm4gjYX4Jp88aB7HCzx-U59hRer5iAsVW7gU3eo8bmK06d ↑
6. A historical chart of PE’s going back to 1950 shows a surge beginning around 1987. The PE rarely exceeded 20 before 1987 and has consistently traded above 20 since. https://www.stockmarketperatio.com/#google_vignette ↑
7. US Treasury, ‘Labor Unions and the U.S. Economy,’ Exhibit 1. https://home.treasury.gov/news/featured-stories/labor-unions-and-the-us-economy ↑
8. Here’s why the US labor movement is so popular but union membership is dwindling,’USA Today, sept 7, 2023, https://www.usatoday.com/story/money/nation-now/2023/09/04/us-union-membership-shrinking/70740125007/ ↑
9. Featherbedding on the Railroads: by law and by Agreement.” J. A Lipowski, Transportation Law Journal, – 8 Transp. L.J. 163 1976 https://www.law.du.edu/documents/transportation-law-journal/past-issues/v08/featherbedding.pdf ↑
10. https://www.theatlantic.com/magazine/archive/1999/03/the-market-as-god/306397/ ↑
11. FI’ GDP contribution/Total GDP, $51.5B/$1238.3B=4.158%. Per Table 1. Value Added by Industry Group for Selected Yea, Gross Domestic Product by Industry for 1947–86 https://apps.bea.gov/scb/pdf/2005/12December/1205_GDP-NAICS.pdf ↑
12. $1,988.2B/$27,720.7= 7.172%. ‘Table 14. Gross Domestic Product by Industry Group: Level and Change from Preceding Period, Gross Domestic Product (Third Estimate), Corporate Profits (Revised Estimate), and GDP by Industry, Third Quarter 2024, BEA. https://www.bea.gov/sites/default/files/2024-12/gdp3q24-3rd.pdf ↑
13. Total Factor Productivity for the economy was 72.796 in 1972 and 104.107 in 2023. 72.796/104.107=1.4301. ↑
14. https://www.bis.org/publ/otc_hy2311.htm ↑
15. Statixta. https://www.statista.com/statistics/469719/private-equity-sector-economic-impact-usa/#statisticContainer ↑
16. Page 17. ↑
17. Share buybacks were valued at $795.5B in 2023 795.5B/$27,720B =2.87%.
18. Buybacks stats–https://www.prnewswire.com/news-releases/sp-500-q4-2023-buybacks-increase-18-0-compared-to-q3–full-year-2023-shows-decline-of-13-8-from-2022-levels-earnings-per-share-impact-continues-to-decline-buybacks-tax-reduced-q4-operating-earnings-by-0-44-and-2023-by-0-40-302091498.html ↑
19. Portfolio Income in 2021 was $248,8 While GDP was $22,997.5B. 248.8/
22,997.5 = 1.08 or 1.1%
Portfolio Income from Table 8: Returns of Active Corporations, Form 1120S, Form 8825, Rental Real Estate Income and Expenses of an S Corporation.’ https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-complete-report-publication-16 ↑
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This content originally appeared on CounterPunch.org and was authored by Madis Senner.