If so — IF this is really about “the 99%” — then you need to understand a few things.
Some of you already do. To those, this article is redundant. To the rest, and to the majority of the people in this nation, it is not.
Last night I appeared on Dylan Ratigan’s show. You can watch the segment, and should. I used the word financialization, which a few people emailed me about and asked me to explain.
Thus, this Ticker.
So what is financialization anyway? It is the process by which something very ordinary (say, a TV set) becomes financed. In doing so there is inherently created the use (and usually the abuse) of leverage.
What is leverage? Leverage is simply the ability to act as though you have much more of something than you really do. For example, you can use leverage to pry off the lid on a beer bottle. Your raw strength is multiplied by the lever (the bottle opener) to lift the cap.
But note that there is no free lunch. While the opener may multiply the force applied to the cap, the distance the opener moves is proportionally reduced compared to the movement of your hand.
In economics, leverage is the use of debt to pretend to have more economic surplus (that is, purchasing power) than you really have.
Let’s take a TV set. If you save up the money to buy one, then go into the store and pay for it, you now own a TV set. There is no leverage involved; you took your economic surplus form working (which you didn’t need for food, energy, shelter and clothing – thus, it’s a true surplus to you) and you expend it on a TV set. The transaction is simple; once it is completed there are no residual effects. If you lose your job the next day, you still have the TV set and will forever more until it either breaks, wears out or you dispose of it in some way.
But what if the TV set costs $500 and you only have $100? Well, you could financialize your acquisition of the TV. That is, you could borrow $400 by buying the TV on installment payments with a $100 down payment, and now you have a TV.
Or do you?
Actually, the bank (or the store) owns a TV. You may have custody of a TV set, but you don’t own a TV set. You owe a debt. You have promised to work tomorrow to cover the expense of the television. You don’t own the TV until you pay it off.
This is all fine and well up until you lose your job. Now the bank comes after you and wants the TV back, plus whatever deficiency there is on reselling the TV set to cover your debt. You suddenly discover, much to your chagrin, that you never owned it at all.
This all sounds pretty ordinary, except that the economic effect of financializing that transaction isn’t, in fact, ordinary at all.
See, in economics there is this thing called “supply and demand.” The more demand there is for something with a given supply, the higher the price tends to be. In ordinary times a gallon jug of drinking water in a store is a dollar, and from the tap it costs so little we don’t ordinarily put a price on it. Yet if there was just a hurricane, and there is no fresh water available, what would the price of that same gallon be? Ah, now we have much demand and very short supply, and as such the price will be quite dear. Perhaps the price of that water might be several gallons of gasoline (for the seller’s generator, of course.)
So what has happened to our economy over the last three decades?
In short, things that never should have been became financialized. And as the goods and services became financialized, demand was shifted upward – people were made “able” to allegedly “buy” things they could not otherwise afford. The expected response in the marketplace to such a thing, predicted by basis economics, was that prices would rise.
Prices, in fact, did exactly what you’d expect.
If you’re wondering why you can’t afford to pay for college by flipping burgers or pizzas in your off hours, this is the reason. It was precisely the distortion of the government making student loan debt non-dischargeable, which made it available to almost everyone at a “low interest rate”, that drove up the price of college educations to the moon. And to the moon they went – up 450% since the 1980s, more than five times as much as average salaries increased.
How about houses? A middle-class house in 1960 sold for $12,000. It had three bedrooms, one bath, a living room and an eat-in kitchen. The walls were plaster (not drywall) and it was of generally-stout construction. The average family income in 1960 was $6,691 or about 1/2 of the price of a house. The average family size was just over 3 persons and about 32% of women were in the workforce; the remainder typically stayed home and raised the kids. That wasn’t so hard to do when you could buy a house at twice the average income.
What happened when we financialized houses? Prices went up. A lot. They went up much faster than did incomes. First to 3x incomes, and in some parts of the nation in the 2000s they went to utterly ridiculous multiples, like 5, 6 even 10x. How? Nobody ever really actually owned the damn house; the bank owned it and you were turned into a financial slave!
How about cellphones? Oh, they’re cheap; we didn’t financialize those, did we? The really nice ones are $199 at the store. Uh, no they’re not. Ever notice that the price of the service is twice that of prepaid? Why do you think that is? That’s simple – the difference between $100/month and $50/month is, well, $600/year. Oh, and that was a two-year contract you signed, so that $500 cell phone that you got such a “deal” on at $199 actually cost you nearly $1,500. That’s right – that nice “smartphone” was financialized and you’re paying three times as much for it as a consequence, rather than buying it right now for cash on a prepaid plan..
How about medical care? In the 1960s your parents wrote a check to the doctor. If it was really serious they probably had insurance; they got billed and then filed a claim. Bankruptcy due to medical costs was extremely rare, and you could almost always afford whatever you needed medical attention for by paying with the money in your wallet.
How about now? Well gee, you’ve got copays and prescriptions are cheap, right? The doctor costs $20 to see and the ‘script he writes is another $10, and you think this is great. Uh, not so fast kemosabe. Ever get laid off? Ever hear of a thing called Cobra? COBRA is a law that says that your employer has to allow you to continue your health insurance once you get fired or are laid off for a period of time. There’s only one catch – you have to pay the entire amount of the health insurance premium yourself. The employer is permitted a 1% (yes, really) mark-up for the service of handling your check.
I cannot tell you how many times someone quit or was fired at my company, got the COBRA paperwork and proceeded to call me and scream that I was screwing them because to keep their “health insurance” they were going to have to fork up $800 a month. That’s $9,600 a year, incidentally, and this was in the 1990s. They always accused me of ripping them off, never mind that it was black-letter law under penalty of prosecution that I could only charge 1% for handling the money and otherwise had to bill them at exactly what the insurance company billed us! No, you don’t have “free” (or even reasonably-priced) health care folks. It’s insanely expensive, and why? Because again we financialized it. Those who have a demand for health care now can (by law) always receive it – it’s effectively the ability to write your own infinite leverage on health services. What has happened to the price? It’s gone to the moon and as a consequence nobody can reasonably afford to show up in a hospital any more for even the most-routine emergency without being bankrupted if they do not have insurance.
Now it is absolutely true that we have treatments and other medical “miracles” that we didn’t 20 or 30 years ago. But that we can do a thing on a technical basis doesn’t mean we can afford to do that thing. We can put a man on the moon, but we can’t afford for everyone to take that flight.
By the way, you don’t happen to think that all this financialization was an accident, do you? Of course not. Shifting the supply and demand curve means there’s more money to be had from the transaction.
Where do you think that money went?
Why, right in the pockets of JP Morgan, Goldman Sachs, Morgan Stanley, Citibank, Bank of America and yes, the bank on the corner. I’m sure you’ve noticed that bank buildings tend to be quite nice. Grand exteriors, high-rise buildings in the middle of cities (very, very expensive real estate), fabulous lobbies with marble floors and other similar visible elements of opulence. Where do you think all the money came from to buy that stuff? Why, from you – the rube standing there in the lobby! Never mind the bankster’s bonuses!
Was this all the “free market” at work? Absolutely not! Student loan debt was given “special status” and cannot be discharged in bankruptcy. Fannie Mae and Freddie Mac massively distorted the housing market. Medical insurance companies are exempt from anti-trust laws, and drug makers were given the ability to legally prohibit you from doing what you’d like with what you own (specifically, reselling things you purchased and paid for.)
All of this distortion in the market occurred due to the direct acts of government acting at the behest of fat cat banksters and industry insiders, using the threat of force to strip your wealth.
Every morning in the financial media we hear about how horrible it will be if we put a stop to this financial rape and the financial system’s size and influence shrink dramatically!
So let’s talk about the distortions and what removing them will do for a minute or two, shall we?
If we get rid of financialization in the above things, what happens?
Well, we’re told that if we cut out the student loan programs, for example, that nobody would be able to afford to go to college.
Is this really true?
Of course it’s not true. You’re not dumb enough to believe that tripe out of the mouthpiece at your college or on CNBC, are you? The college wants you to believe that, and so do the banks. But what happens if tomorrow all the “free money” loans stop? Now the college has empty classrooms because nobody comes any more. Students can’t afford to attend, so they don’t.
What happens the next morning at that college?
Oh that’s simple: See, it doesn’t cost much to provide a few desks, chairs, and a roof over head along with a calculus book, does it? Nor does an instructor cost that much when spread across a student body. Let’s see how cheaply a college can educate you, if they’re unable to extract from you promises from the future and must instead talk you into providing them with economic surplus from your current efforts.
Let’s assume for a minute that there are 30 Calculus students in this college class and five instructional hours in a day, so we can serve 150 students in one room. Figure the room is 1,000 square feet, which is more than sufficient (5×5 per student * 30 students plus room for the chalkboard, desk at the front and free space to move around; a 25×40 space should be more than sufficient.) A buck-a-foot a month ($12/year/foot) is certainly doable in most areas if you’re looking for usable space, not gilded BS. Four months is one term, so this is $4,000 for the space. Figure another grand for the rental on the chairs and desks and we’re up to $5,000.
We have 150 students so the facility costs them $33 each for this class. What’s the professor cost? We’ll pay him $100,000 a year; we’re not pigs and this is Calculus, a typical “first year” college class, not a grad school thing. He therefore makes $33,000 teaching class for this semester (four months.) That’s $220. We’re now at $250 per student for a four hour per week class, or about $60/credit hour. Note that the professor is teaching four days in the classroom and has one for office work and grading; he works a five-day week of five hour days. Not a bad gig if you ask me.
If the average student’s full load is 15 semester-hours tuition is $900 per semester to cover costs.
Guess what – in the late 1970s and early 1980s it wasn’t that much more than that. I remember paying it.
It doesn’t have to be today either. It is because it can be. Because you can pay due to the financialization, even though you’re not really paying — your promising to pay tomorrow — prices have gone to the moon. Supply and demand were distorted, you got screwed and the banksters skimmed off the extra money, along with the college administrators. Oh, and neither of them were honest with you about what happened either.
The important point here is that if we cut off the financialization of college you will still get an education. The schools will scream and many will go bankrupt, but soon on the same ground where there was a bankrupt college there will be a new one, and this one will charge $2,000 a semester to attend instead of $10,000 or $20,000. The difference? You’ll have to pay cash, but you’ll be able to work a part-time job for the two grand and thus you’ll have no debt!
Who wins? You do. Who loses? The fat cat college administrators with their half-million dollar salaries and the banksters who can’t hold your college loans over your head and threaten you with wage garnishments until you’re 80!
Houses are no different and neither is medical care. The screaming about how “nobody will be able to go to the doctor” or “nobody will be able to buy a house” is a lie. The doctor can set his fee at $100,000 for his services if he wants but if nobody can or will pay him $100,000 then he sells no service. That doctor goes bankrupt immediately, soon there will be a different doctor (or maybe the same one after he goes through bankruptcy) and suddenly medical care will be much-more reasonably priced! After all, if nobody can buy then the seller can’t make a living either, can he? Prices will be forced down to what the ordinary person can afford to pay.
When it comes to drugs and devices its even worse. Our government allows blatant price-fixing. Viagra is 10% of the cost per pill in America just a few miles away in Canada. It’s illegal, however, for you to re-import it from Canada back into the US. Why?
Simple: Canada’s single-payer health system won’t pay more than $2 for the pill. The manufacturer wants to sell them, so they do. They make a profit. But only on the “copy” of the pill – there’s no profit for the R&D in that price. So who gets to pay for the R&D of virtually every drug and device in the medical world today? You do, and it’s literally forced upon you at gunpoint because our government prohibits under penalty of law people from selling that which they first bought and paid for!
There is no way that such a price disparity would hold for more than 10 minutes were these laws to be dropped. You get screwed on your prescriptions and devices you buy intentionally by our government through their protection of these industries. You get financially raped so that everyone in the world can enjoy our medical technology at the mere reproduction cost and the banksters and drug companies can get rich. It’s an outrage and again, it happens due to financialization of the medical industry and the force of government coercion, NOT the free market.
Here’s the question when you get down to it: Do you want to fix this or not?
If you do then the demand is not for “single-payer health care” or “free college educations” or “debt forgiveness.”
Those demands, if you succeed in obtaining them, will make the problem worse. You will become more of a slave through those demands, not less.
The demand you must issue is that all the special protections that are currently afforded by government are to be dropped. The government props under home lending are taken away. The government mandates that people be treated medically irrespective of ability to pay and are able to cost-shift their care to others go away. The non-dischargable nature of student loan debt goes away. And government protection prohibiting the resale of anything someone owns that is legitimate (e.g. a truck load of Viagra) goes away.
Now, if you are a student with a lot of debt, you can file for bankruptcy. Sure, your credit gets trashed if you file bankruptcy (and it should as you did foolishly take the loan) but the entity who loaned the money foolishly with not a care in the world if you could actually pay loses their money! They will immediately, of course, stop making foolish loans — like lending kids $75,000 to study history. The price of college educations will immediately fall back in line with ability to pay via a part-time job just as it was for more than a hundred years before we financialized college educations.
Without Fannie, Freddie, FHA and similar, along with demanding that before you foreclose you must be able to show actual transfer and ownership of the note house prices will collapse. Yes, you’ll need a lot of money for a down payment in percentage terms, but this is good, not bad. The average home price will be $100,000 or less against an average household income of $50,000, not $200,000, $300,000 or more. You’ll have to save $20,000 before you can buy, but that’s ok too. You’ll have immediate equity and you won’t be so far in debt. If you want to buy a house you’d like prices to be low, not high, right? House prices will return to where they were in relationship to incomes before we financialized them, and you will be able to buy a house!
Without the ability to cost-shift medical care, drugs and devices the price of this care will collapse. Some advanced technologies will become rare and remain expensive, simply because they are technically very difficult and thus do have an actual high cost. Most people will not be able to afford these medical technologies. But routine and expected medical care will become much cheaper, simply because it has to in order for the doctor, hospital and drug company to remain in business! You will still be able to go see the doctor, your broken leg will still get set, and most medical care and procedures will remain available for far less than is currently charged, simply because the firms and people involved in providing it want to continue to have jobs and as such they must charge what can be paid from your personal economic surplus, not your ability to demand that an “infinite source” of money cover the bill.
You can’t fix this any other way folks. I am well-aware that this goes against the grain of “I need it right damn now” that has imbued our society, but mathematics simply doesn’t care about whether you agree or disagree. It just is.
We can de-fang the banksters. It’s not even particularly difficult to do. The hard part is understanding that you’re not screwing yourself by taking this step and you won’t lose. Oh the banksters, the universities, the doctors and the Realtors will all lie to you and claim you’ll never go to college, you’ll never see a doctor and you’ll never own a house, but the fact is that they’re all lying. The fact of the matter is that supply and demand governed the ramp in prices of all three of these categories of goods and services, and when demand collapses that very same economic law will govern the price collapse too!
You can bet the banksters, universities, medical societies and housing industry insiders know this, and they’re scared. They know that if you figure it out their income is cut in half or more. They are returned to middle-class working people rather than the fat cat status they enjoy today. Doctors, college professors, home builders, bankers and Realtors used to be middle-class citizens, not gold-clad elites driving around in Lamborghinis and living in mansions!
What’s worse (to them) if you succeed in breaking the back of financialization, these people will lose the ability to enslave you. You will have returned to yourself the power to choose when you work, how hard you work, and what you do with your own economic surplus, instead of having pledged it to the bank to buy the car, the bank to buy the house, and the insurance company in the event you get sick.
More importantly than your personal interest in this is that as a society we’ve reached the limits of the ability to financialize our lives. That’s why the markets, housing and economy crashed in 2007. We had used financial leverage to live beyond our means for the previous decade but in fact the imbalances and intentional distortions in the market date back to 1980. There has not been one three month period where we have not abused leverage and financialization since that time. Not one.
This is the choice we have before us.
We did not find ourselves here because of the “free market.” We are here because the rich and powerful demanded special protections from government that allowed them to enslave you, they enticed you into taking that first hit off the crack pipe of cheap money, and then once you were hooked good they used the jackboot of the government to screw you through changes in the law and special protections for themselves so that you could not easily escape.
The solution is not to demand “free stuff” or “fairness.”
The only solution is to remove the excess leverage from the economy – to get rid of the debt that has been accumulated and force recognition of the fact that not only are many people bankrupt but the financial institutions are as well. Only when the balance sheets on both sides are cleared can the economy recover.
This is the choice we face ladies and gentlemen. We can either demand changes that are mathematically sustainable or we will fail at our goal and the spiral you’re seeing right now in Greece will come here.