Well, dear readers, at last it has happened. Treasuries have been downgraded by a rating agency — an agency, no less, that assigned triple-A status to subprime RMBS, and a not-so-bad single-A status to Lehman Brothers, just before so much exploded three years ago. This rating comedy, for its part, follows directly on that known as the ‘debt ceiling’ imbroglio last week.
What better time, then, to present Act II of our own send-up, Act I of which appeared at this site several days ago: http://origin.benzinga.com/news/11/08/1831317/its-come-to-this-act-i-a-financially-engineered-yeoman-republic-comes-into-being-?
We take up where Act I left off. That, you’ll recall, was with a portentous suggestion: Even an unprecedentedly prosperous, more or less egalitarian republic — first set, and ever then kept, on a stellar path first by a brilliant first Treasury Secretary and then by his able successors — could be brought a cropper by insidious forces acting within.
Here goes …
It began late in the 20th century, when corrupt would-be plutocrats first sought, then successfully seized, control over large swathes of the national government. In this they did much as their ancestral counterparts had done in the mother country three centuries earlier. They likewise did much as their class-counterparts down south had done over the 19th and 20th centuries, in the ‘banana republics.’ All that distinguished the latest rendition of this all too familiar ‘decline and fall’ story from its predecessors were a few of the techniques and technologies employed by the perpetrators: First they purchased ‘consultants’ and ‘focus groups’ with a view to adapting the dark arts of psychological manipulation to political purposes. Then they purchased media adverts and ‘news’ organs employing those arts. Thereby the soon-to-be plutocrats commenced a long course of procuring concubine legislators, presidents, and policies.
In surprisingly short order, the plutocrats’ puppet politicos began to dismantle those portions of the revenue code to which plutocrats were subject. They worked simultaneously to take apart regulatory programs to which firms owned by plutocrats –- including, ominously as we’ll see, financial firms –- also were subject. Next they dismantled the legal barriers to trade with countries that, unlike our republic, did not regulate industry, labour markets, or wealth spreads at all. That of course heightened pressures upon the republic’s longstanding tax, labour, and other salutary regimes. It also ‘squeezed,’ of course, that ‘yeoman’ middle class which these regimes were in place first to foster and then to maintain. Finally, as if for good measure, the plutocrats’ politicos named to the nation’s high courts certain judges and ‘justices.’ These people straightaway set about vaporizing the laws that had regulated plutocrat purchases of elections and public officials themselves. The same judges hollowed out much in the way of the national laws’ constitutional supremacy over sub-national state laws. The strong federation that our first Treasury Secretary had launched thus began to lurch back toward imbecile ‘confederation’ — that Rube Goldberg contraption which had presided in impotence over national entropy, interstate squabbling, and consequent stagnation prior to 1787.
As if to add idiomatic insult to all of the legal, political, and financial injury, and in a chilling instance of what literate folk recognised for Orwellian ‘newspeak,’ the aforementioned court-appointees and their legal cronies called themselves ‘federalists.’ That, you’ll recall, was a name first employed by our first Treasury Secretary and his confrères two centuries earlier. What these new ‘federalists’ actually were, of course, was precisely what had been called ‘anti-federalists’ in our Secretary’s day. They were the anti-constitutional faction comprising ‘states’ rights’-favouring slave-holders and bigoted, whiskey-slugging yahoos. Our ‘new federalists,’ in other words, were ‘new’ indeed: No previous Federalists had looked anything like them.
Plutocrat newspeak wasn’t confined to the false self-descriptions of anti-federalist grandees and yahoos, however. Like a relentless bacterium it spread to contaminate all of our political culture. The technique was employed, in particular, to rechristen a multitude of cherished and critically necessary national programs and policies. Excises on birth-lottery winnings –- estate taxes –- for example, were redubbed ‘death taxes,’ as if it were corpses rather than silver spoon spawn of moneyed aristocrats who had been asked to contribute to the public fisc. Billionaires and millionaires who fell within higher income tax brackets, for their part, now were called ‘small family businesses.’ Vast and malodorous agricultural combines were relabeled ‘small family farms.’ Through the crudest of linguistic conjuring tricks, in short, the sick toxic chemical, abattoir cannibal worlds of Frank Norris and Upton Sinclair were ‘rebranded’ as insipidly quaint Norman Rockwell portraits. The plutocrats undermined and dismantled not only the machinery of the republic, in other words, but also the language its citizens spoke, hence the minds in which they attempted to think.
In what was perhaps a crowning measure of irony along these same lines, the plutocrats financed what they called ‘think tanks.’ Here Pavlovian advertising executives and university flunkies ‘thought’ up and planned all of the aforementioned assaults on the polity, the economy, and the brain. In a well coordinated counterpart move, the plutocrats also established ‘foundations’ charged with planting plutocrat payees and prostitutes in the nation’s centres of higher learning. The plutocrats’ ‘news’ networks then wasted no time insinuating the ‘think’ tanks’ and foundations’ quasi-cognitive germs into the brains of the general public. Often over-fed, sometimes raisin-faced men and peroxide-blond policy-bimbos uttered their assigned words and phrases without cease, effectively disseminating ‘ear worms’ across all the nation from ubiquitous blue-glowing television monitors. These latter, for their part, were obligingly found not only in private, but increasingly also in public spaces — elevators, waiting rooms, bank teller windows, you name it. In consequence much of the citizenry, upon whose continued attention, intelligent involvement, and considered judgment an enduring republic must always depend, devolved quickly into a theretofore unknown hybrid species: something between languorous mollusks and screeching directionless chimpanzees.
Now one crucial result of the unremitting demolition work done by the plutocrats’ purchased politicos was, as hinted at before, that the national government was starved of its principal sources of revenue. That included revenue meant to pay creditors, maintain public infrastructure, finance regulatory activity, and buttress employment-sustaining demand for goods, services, and productive capital during times of economic slowdown — which, believe us, would come. These essential government functions therefore grew steadily more difficult to discharge. Domestic living conditions thus began gradually, then more rapidly, to fray and unravel for more and more citizens. They began to resemble nothing so much as those conditions that had prevailed across our new nation before 1787, as described in Act I of our drama.
A nation with immense intellectual vitality, technological know-how, and universities second to none; a nation with more Nobel laureates than any other; a nation whose urban structures had towered to the heavens; whose roads had once flowed with gleaming automobiles; whose bridges spanned once unspannable chasms… began to resemble nothing so much as a burned and abandoned, crumbled-asphalt-strewn Florida suburb overrun by tall grass and dog-eating monitor lizards. And, as befits life in environments like these, people began once again packing pistols and rifles — as had not generally been done since their predecessors roamed forests in animal skins. The only difference this time was that our latter day arms-bearers, plied with corn syrup, ‘cheese foods,’ and cheap tasteless mead drinks, appeared to be rather less healthy. Oh, and that now the earlier mentioned plutocrat-procured judges and ‘justices’ maintained that the private pistol-packing and other forms of bestialization underway counted as constitutional rights.
A closely related consequence of the plutocrats’ plenary demolition work had to do with the class structure of our society, a structure that both our first Treasury Secretary and his chief nemisis — the bankrupt slave-owning ‘gentleman planter’ who wrote lovely words about autarky and independence — had labored mightily to introduce: Many working people, who as noted before had by dint of progressive taxation, trade-regulation, and labour-market-regulation come to constitute a great ‘yeoman’ middle class, now began sinking toward lower class status. The few who did not were for their part able to maintain middle class lifeways only by means of alarmingly growing indebtedness to plutocrat-owned lending companies — classic debt dependence of the sort that, ironically, had most troubled the ‘gentleman planters’ among our Founders. Ah, but this was no longer surprising, now that the largest bank in the nation was headquartered in the heart of the Piedmont region that once was the centre of anti-bank paranoia. The growing consumer debt burden was in any event more than an affront to our history, however. It would prove a significant vulnerability were financial contraction to occur — and again, please believe us, it would. The debt-overhang would then prove a slump-lengthening long-term liability.
And again there were knock-on effects on the cuture at large. Our growingly indebted, less and less educated, vaguely diquieted populace, not knowing how to respond to their worsening plight, sought solace in strange new entertainments, many of them televised or playable as ‘games’ upon laptop computers. These in eerily prescient ways presaged or dramatized what life in our nation itself was becoming: Mud-slathered half-naked people, stranded on islands, consumed insects and conspired to harm one another. Unintelligibly motivated sociopaths carrying weapons through dark streets eviscerated all signs of human and animal, even vegetable life. Unathletic men clad in bright-coloured leather costumes drove automobiles in circles to no evident purpose. Panem et circenses.
Another knock-on effect of the plutocrats’ swathe of destruction, this one a direct consequence of changes to the tax code and straightforward counterpart to the middle class’s dwindling, was dramatically widening social and economic inequality. Wealth and income skewed to the tops of their distributions, to the point that far fewer than five per cent of the population held well more than 90 per cent of its wealth. Widely tracked inequality indices accordingly reached measures not seen since some 80 years earlier. This was a bit ominous, for the just mentioned occasion was immediately prior to a notorious stock and real estate crash and ensuing ‘great’ depression. The links among inequality, market crash, and longterm contraction were by no means accidental, either, for reasons to which we next turn; so the return to immediate pre-‘great’-depression levels was worrisome indeed.
Finally, one additional and again related result of the changes our plutocrats’ purchased politicos wrought had to do with money-flow patterns in the republic: The plutocrats, already sated with consumer and luxury goods, not to mention liquors and narcotic powders, found themselves suddenly flush with more funds. These, crucially, were not apt to feed into employment-sustaining consumer demand. Instead they flowed straight toward unproductive, speculative investments –- perversely enough, in the very same markets our first Treasury Secretary and his successors had done so much to establish, then moderate. Why would that be? It was because productive investment makes sense only where there are potential consumers of that which productive investment-recipients produce. And the earlier mentioned tax giveaways to grandees, along with their sequelae as just catalogue ued, had unremittingly siphoned income and wealth from that great middle class which our first Secretary and his successors had done so much to nurture and grow.
In short order, therefore, in what amounted to a dangerous complement to shrinking consumer demand, our newly flush plutocrats channeled their moneys in manners that bid up the prices of new ‘financial products.’ Many of these were associated with unproduced things that were in finite and not readily extensible supply –- things like real estate. The newly flush plutocrats also directed their moneys, relatedly, to finance ‘second mortgages,’ ‘home equity loans,’ and ‘home equity lines of credit’ taken out by the ever more desperate yeomanry. These were, in other words, yet new forms of consumer debt –- debt that in this case quite ominously eviscerates home ownership stakes –- racked up by yeoman now desparately seeking to maintain accustomed material living standards. The aforementioned debt overhang accordingly grew to enormous proportions. Were a crash to come — and, please believe us, it would — deep and protracted depression, potentially worse than that ‘great’ depression of 80 years earlier, would now be a virtual certainty.
Ah, but the plutocrats were not finished, they were only beginning: Next their puppet politicos led the republic into two stratosphericallty costly wars of choice to no national purpose — after taking the axe to the tax take. These were wars that yielded, moreover, no spinoff technologies or other developments that might feed back in salutary ways into the peacetime economy. The public fisc was accordingly drained even further. There were no offsetting advantages to the nation’s economy other than, perhaps, a few petroleum and defence contracting firms with which the republic’s nominal president and vice president were affiliated.
The nation went deep and then deeper into debt to finance these gratuitous family adventures. It owed much of the debt, what is more, to one of those nations with unregulated product and labour markets that plutocrat-procured trade-liberalization had helped rack up wide-gaping trade surpluses with our republic. This was a nation, moreover, apt in future to constitute an immeasurably greater ‘security threat’ to the nation than did either of the two backwaters the plutocrats’ president had invaded. The republic also lost ‘goodwill value’ through these behaviours: Once widely admired like its Founders themselves, it steadily came to be feared and reviled by other nations, much like the new plutocrat ‘leaders’ themselves. Our republic, in sum, began to look much like a long-ago rival to its own mother country, whose sterile wars had brought it to ruin as soon as the silver it drew from its slave-labour colonies was exhausted. And this happened all while, ironically, it likewise began to resemble that country’s former colonies — the ‘banana republics’ — in its wealth spreads and consequent feudalist social conditions.
But only now do we come to the pièce de résistance: Remember the speculative pursuits of the new cash-flush plutocrats mentioned a moment ago? Well, those in the secondary real estate markets fuelled what became a spectacular asset price bubble, following quickly on earlier such bubbles in equity markets. This grew to the point that nearly all of the principal institutions composing the repuclic’s –- as well as the world’s –- financial infrastructure were exposed. Recycled current account surpluses accumulated by the aforementioned unregulated trading ‘partner’ added more fuel to the fire. So did the cheap credit policies sought by the speculators and maintained for near 20 years by the nation’s chief money modulator –- a favourite of the plutocrats, appointed and reappointed by their purchased presidents. This fellow conveniently professed to believe asset price bubbles undetectable if not indeed impossible –- all while, fittingly enough, reading id-pornography penned by a lumpen-philosopher given to celebrating the great human capacity for self-flattery.
When the final gargantuan credit-fuelled bubble at long last imploded as all of them do, the aforementioned financial firms now were imperiled. They accordingly ceased making credit available for the financing of employment-sustaining, productive activity. Indebted consumers, for their part, retrenched: consumer demand shrunk to the vanishing point. The government, in consequence, had for a time to make funding available — both to shore up the mentioned institutions, and to augment demand for employment-sustaining products and services sold in the ‘real’ economy. Its ‘full faith and credit,’ for better or worse, was about all that remained to be credited.
But all of this of course led to yet further drain on the public fisc. The national debt, long a ‘blessing’ as the first Secretary had called it and as Act I explained it — when properly managed and funded — threatened in time to become a great curse. For it grew to equal in size the gross national product. And it was not being offset by investments in durable assets or value-adding public infrastructure of any kind, only purposeless blood-draining wars and now-dispersed bubble gasses. Nor, of course, was the debt being reliably funded any longer; the plutocrats’ hit on the revenue code had seen to that.
But the debt was emphatically not a curse yet. For the nation’s Treasury securities still constituted the ‘gold standard’ where investors’ trust was concerned. The nation looked apt to be able to borrow both cheaply and indefinitely. Yields –- interest charges –-on Treasuries remained unprecedentedly low, owing in large part to the huge economy’s idle capacity itself. And there were few real competing investments, after all. Private firms did not look to be good prospects absent collective action — that is, government stimulus. And no other nation seemed as good a bet as our remarkably creative, pragmatic, and prosperous republic — financially-engineered from the proverbial ‘get-go’ by a brilliant first Treasury Secretary, then ably stewarded by his able successors. Indeed the nation’s prospects for full economic recovery and renewed opulence, were future borrowings spent wisely on, say, repairing the nation’s once state-of-the-art transport, water-treatment, education and other infrastructures, were unparalleled.
How, then, did the debt become a curse? And how did the nation manage to sink deeper into its hole? Narrowly framed, it was through nothing more complicated than one final act of plutocrat chicanery. More broadly framed, it was through a strange sort of tricorner-hat-wearing suicide virus, set upon the republic by its plutocrats after the government functionaries they had already procured had proved not quite enough.
Here’s how it happened:
First, the aforementioned bubble’s bursting and consequent hardships had filled many people –- especially our now many uneducated people –- with great fear. Fear of course lays people prone to nostalgia and paranoia. And to both of these panic dispositions our plutocrats were prepared to appeal, employing the selfsame manipulative techniques noted earlier.
The new President, you see, who won election during the worst of the crisis, was of a different ethnicity than previous presidents — an ethnicity shared by people once owned by the ancestral counterparts of our latterday yahoos and plutocrats. His surname, moreover, bore a vaguish resemblance to the first name of one ‘terrorist’ feared by our terrified citizenry. The President’s generally unused middle name, what is more, stemmed from a culture wherein a religion not widely practiced in the republic, but widely practiced in nations from which many ‘terrorists’ seemed to hail, figured importantly.
Why not, then, the plutocrats reasoned, encourage Pavlovian mental association between the new President and alien ‘terrorists’ in the minds of the nation’s now many uneducated successors to those bigoted whiskey-slugging yahoos of the 1780s? At the same time, play up this president’s ‘differentness’ by regularly repeating aloud his alien-sounding middle name. Further, encourage belief that he is literally ‘alien’ and ‘illegitimate’ by spreading gratuitous doubts about the authenticity of his birth certificate.
Repeat also, incessantly over our ‘news’ organs for maximal Pavlovian effect, the word ‘socialism’ in connection with this man and his policies. Do so notwithstanding that he is infinitely less ‘socialist’ than even the first modern ‘conservative’ president of our republic, Richard M. Nixon. Do this because uneducated people don’t know what ‘socialism’ means or who Richard M. Nixon was anyway, but do find that the ‘s’ word rings vaguely civilized and European and, therefore, ‘suspect.’ And if some of them do in fact know who Nixon was, well then so much the better. For they’ll know that the man was impeached, and might therefore call for the same of the new President.
So much for the paranoia piece of the strategy. Next, for the nostalgia portion, hark back to the aforementioned heroic founding era. That was an era, again, during which people of the new President’s ethnicity were chattel property belonging to people of the now struggling and fearful lower middle class’s ethnicity. It was also an era during which many of the Founders –- though notably not our early abolitionist first Treasury Secretary, who founded his state’s manumission society –- approved that arrangement. Induce these poor slobs into thinking that somehow taxation, a well funded national debt, and those indispensible forms of collective –- that is, government –- action which taxation and debt-finance enable were themselves alien to that era.
Suggest, in other words, that all of the best attributes of our great early republic that still characterise our modern republic … were alien to that early republic, rather than to its imbecile predecessor –- the unfunded, ineffectual, and therefore long since abandoned ‘confederation.’ Do so, indeed, notwithstanding the fact that our Founder and first Treasury Secretary, acting in the name of our still worshipped first President during the very era now being invoked, introduced all of these measures wish to repudiate. For, once again, the uneducated bumpkins will not know the difference. And we can then ‘channel’ their ‘energy’ to the cause of more plutocrat plunder.
Finally, wrap up the paranoia, the nostalgia, and that which has now brought them to fever-pitch all together into one oily package: Get frightened citizens to associate, again in unthinking Pavlovian fashion, the manufactured legal and cultural alienness of the President, along with the manufactured political and historical alienness of his sensible taxation, regulation, and borrowing policies, with the current economic calamity itself! Suggest, in other words, that the President’s ethnicity and ‘forged’ birth certificate, the national debt and taxation, and regulation and government themselves are the joint causes of the bubble and burst and ensuing depression, rather than irrelevant or co-symptom or cure, respectively, of the same fisc-draining, plutocrat-propagated mental and physical illness from which we’ve now suffered for decades.
And give the slobs knee breaches and tri-corner hats for good measure, so as to play up the manufactured ersatz resonance with our republic’s traditions that you wish falsely to foment. Why, before you know it, you’ll have a full-bore, ‘home-grown,’ ‘grassroots’ ‘patriotic’ ‘movement’ underway, all underwritten by Kansas petroleum profits, and you’ll capture yet more of the government to boot.
And lo, it all happened. These ‘energized’ –- that is, again in the words of a poet, ‘frightened hysterical naked’ –- people managed to take one house of the nation’s bicameral legislature, and to take portions of the other, during a midterm election. That enabled them, in turn, to block nearly every government measure that would have been salutary –- indeed, that would have helped them, the ‘energized’ bumpkins themselves, before all. They turned everything upside-down, as is the wont of hysterical crowds made of untutored lumpish folk, concentrating public discussion on ‘debt-reducing’ when capacity was idle and borrowing costs were unprecedentedly low. It was the full economic-policy equivalent of states’-righters’ calling themselves ‘federalists.’ It was Orwellian newspeak as spoken by illiterate crackpots in knee-breeches and tri-corner hats, people whose lips moved when they read –- when they could read at all.
The bumpkin-‘legislators’ –- is the word not at this point implausibly august? -– blocked funding for bubble-preempting regulations that their immediate predecessors had passed in the wake of the financial meltdown, beckoning a yet more calamitous meltdown in future. They blocked nominees to the bench and to regulatory agencies, including finance-regulatory agencies, further de-manning the government. They demanded deep cuts to government expenditure at precisely the time that only government spending could underwrite employment-sustaining productive activity –- activity that would sustain the bupkins’ own employment, at places other than low-paying ‘mall’ outlets peddling carcinogenic imports from the aforementioned trading ‘partner.’
And finally, as the nation’s economy continued to sputter, its public infrastructure crumbled to complete ruin, and its unregulated trading ‘partner’ began economically to surge past them even while offering indefinitely continuing cheap credit, they blocked legislation necessary to enable the nation to redeem its own debt. That’s right: they demanded default; unprecedented default.
The nation that on one day could borrow more cheaply than any entity under the sun; the nation that now sorely needed to borrow, since it lacked tax funding, so as to set massively idle capacity back to productive activity and citizens to remunerative work; the nation whose credit was second to none; on the very following day … could not borrow at all.
The plutocrats’ purchased politicos had already transformed the nation from world’s largest creditor to world’s largest debtor within several short years. Now their new and improved bumpkin-legislators transformed it, for the first time in all of its 230 year history, to number one deadbeat. They forced the republic to default, for the very first time since its first Treasury Secretary had placed it upon a firm financial footing by issuing well-funded debt instruments, on its own golden Treasuries.
And so: Overnight, the world’s sole reserve asset lost all its luster –- a luster our Founder first Treasury Secretary and all his successors had labored like Hercules to establish and maintain. Portfolios plummeted instantly in value. Fiduciaries and regulated institutions shed their now low-rated Treasuries per duty. Repo and other credit markets froze up entirely. Firms right and left went insolvent quite literally overnight. Interest rates shot out of sight. There seemed to be no firm ground anywhere upon which anyone could stand.
Everyone trembled, waited, and watched, in a strange sort of wide-eyed wonderment — as if thrilled and spooked simultaneously, like all of those uneasily smiling, morbidly fascinated tourists who turn up in Times Square at dusk. But waiting and watching for what? No one and nothing could act. The only collective agent possessed of sufficient wherewithal to address this collective calamity –- the national government –- had been consumed and dismembered out of existence by the plutocrats and their underling bunglers, termites who had returned everything to dirt.
Financial, then with it productive, activity ground to an absolute halt — the economic equivalent of zero degrees Kelvin. The economy simply stopped functioning. Soon folk were literally starving. We were right back to where our forebears had been circa 1787 -– bankrupt, broken, wretched and vulnerable. It was as though the Constitution, the effectual government, the inexorable growth of a prosperous, egalitarian, industrious yeoman republic … had simply never happened.
The yahoos in their 18th century costumes and Nascar suits now shook their heads slack-jawed in disbelief. What had happened?
Robert Hockett is Professor of Law at Cornell University, where he teaches, researches, and writes in the fields of domestic and transnational financial law and economics.