The Financial Class and the Middle Class

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Erik Kain

Erik writes about video games at Forbes and politics at Mother Jones. He's the contributor of The League though he hasn't written much here lately. He can be found occasionally composing 140 character cultural analysis on Twitter.

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30 Responses

  1. Avatar Maxwell James
    Ignored
    says:

    How does organized labor work as a counter to the financial industry?

    You probably realize this, but if anything, organized labor has historically enabled the excesses of the financial sector. The big pension funds have historically relied on high returns – and thus big gambles – in order to meet their obligations, which is why they’re all on the verge of bankruptcy right now. From what I can tell the same has been true in countries where labor is stronger.

    I’m generally pro-union but I think this has been a huge and costly blind spot for them.Report

  2. Avatar Bob
    Ignored
    says:

    “Smaller, more leveraged banks….”

    Shouldn’t that be “less” leveraged banks?Report

  3. Avatar Bob
    Ignored
    says:

    I’ve always thought that lack leverage rules was the main factor in the recent banking crisis. Legislating leverage requirements seems a simple solution. I said simple, not easy.Report

    • Avatar Will H. in reply to Bob
      Ignored
      says:

      The two most highly leveraged banking systems in the world are:
      1. Switzerland; and
      2. Canada.

      And if you’ve been following how Canadian banks have been buying up troubled American banks, then it is fairly plain that leveraging is not really the issue.
      This isn’t about margin calls.Report

      • Avatar Fear and Loathing in Georgetown in reply to Will H.
        Ignored
        says:

        Will H:

        You say “are.” Do you mean to say that Switzerland and Canada are the most highly leveraged now? If so, that’s not really relevant to the banking crisis.

        If you are saying they were the most highly leveraged before the crisis, in 2007, say, then that is relevant. But I seriously doubt Canada would be among the most highly leveraged.

        Where are you getting this data from?Report

        • Avatar Will H. in reply to Fear and Loathing in Georgetown
          Ignored
          says:

          I’ll have to see if I can find that again. This was a paper with a lot of graphs that examined the banking systems of some 20 different nations. The US was high, but about #5 or so.

          But yes, both is and were.Report

          • Avatar Fear and Loathing in Georgetown in reply to Will H.
            Ignored
            says:

            I found a graph here – http://economistonline.muogao.com/2008/12/bank-leverage-ratio-by-country.html.

            In 2007, Canada less leveraged than the Eurozone, UK, US investment banks. Less leveraged than all in the graph save US commercial banks.

            All financial crises are the product of leverage. Put simply — when people lose savings it’s a problem, but when they lose money they’ve borrowed they panic.

            Leaving aside the specifics of margin calls, there were a variety of leverage issues at stake here in the crisis. People borrow money, i.e. use leverage, to buy homes. Lower down payments means more leverage. Banks were trading OTC derivatives without sufficient capital to back up the risk. Again, leverage.

            Bob was correct. This was about leverage. The question is how do we get the requirements (for bank capital, collateral, down payments, etc) right. Not easy. However, given that everybody, rather than realizing that leverage, broadly speaking, was and is always the reason for these crises, and using that as the basis for coming up with rules to mitigate systematic risk, have instead picked up whatever piece of the crisis is convenient to beat their particular hobbyhorse. The left is blaming banks and saying consumers were duped. The right is blaming the CRA, Fannie and Freddie.

            BTW, Will H. I’m not accusing you of that latter point. But leverage is the key point and it worries me that people are saying that it’s not.Report

            • Avatar Will H. in reply to Fear and Loathing in Georgetown
              Ignored
              says:

              I still don’t see where going long where you should short amounts to a leveraging issue.
              Of course, it was the extensive leveraging that enabled the mess to become so massive.
              But it still comes down to positioning.

              Now, I don’t see the CRA as being a cause.
              But every one of those other things you named do have a degree of culpability.
              I don’t think that Frannie is bad, but it was definitely mismanaged. I believe they would do well to model their requirements after NACA’s.Report

      • Avatar Will H. in reply to Will H.
        Ignored
        says:

        And to be clear about this…
        A margin call is when you borrow the money to purchase a stock, and then the people that you borrowed the money from want it back. That’s not what happened here.
        When you buy a stock, and the bid price tanks, that’s just a bad investment. Leveraging has nothing to do with it.
        Of course, the other side of profit is risk.
        The risk was not managed well in the US.
        Canada has a remarkably similar system; however, they were just a bit more prudent. And the commodity currency didn’t hurt them a bit; in fact, it helped them, the same as Australia.Report

        • Avatar North in reply to Will H.
          Ignored
          says:

          Well there is a lot more differences than it may seem at first glance.
          Canada has, for example, no mortgage interest deduction in their tax code. The Canadians also have no Fannie Mae/Freddie Mac style entities purchasing mortgages; most banks in Canada have to hold the mortgages they issue on their own books. Also the Canadian banking system is very strictly regulated to the point where there are only really a small handful of big national banks (though there are a romping horde of Credit Unions and smaller financial entities) and as a personal anectdote I find the personal finacial services offered in the US to be cheaper and more convenient (but full disclosure I haven’t banked in Canada in like five years so things may have improved a lot there).

          I’ll note also that only a few years ago the relatively predictable and moderate profits of Canada’s stoic boring banks were the subject of considerable mockery by their peers south of the border and east across the pond in London.Report

  4. Avatar North
    Ignored
    says:

    Well we have made some small changes. We’ll have to see how they shake out. I’d really have liked a really strong Volcker rule implemented personally.
    As to your general question, I don’t know if there are natural opponents to the financial industry like the natural opposition between labor and management.Report

    • Avatar Bob in reply to North
      Ignored
      says:

      “…I don’t know if there are natural opponents to the financial industry like the natural opposition between labor and management.”

      My CommieDem side, my only side, sez they are. I don’t see a lot of day light between finance and management when it comes to the fostering of widespread income inequality. “Meet the new boss, same as the old boss,” is my view.

      I think the primary question has to be, How can we grow labor membership?

      Thanks to E.D. for discussing labors role here.Report

      • Avatar North in reply to Bob
        Ignored
        says:

        Okay Bob, fair enough, but how do you figure? I mean reason it out for me. Let me try from my own end.

        The Old Way:
        -Management needs more money/profitability so they put the screws to the workers: longer hours, lower wages, more unpleasant working conditions.
        -Labor protects the workers, fights managers to prevent such mistreatment.

        The Modern Economy:
        -Financiers create complex interwoven layers of financial instruments that generate profit mostly by financial maneuvering. When all of this goes wrong this precipitates a financial crisis that causes cascading failures and threatens the entire financial system. Management, as in management of workers, involvement with most of this is relatively peripheral.

        How, in this situation, do the interests of Labor and Finance necessarily conflict? How would the Teamsters or Service Industry Union be in direct conflict with the financiers? I don’t see it myself.Report

        • Avatar Bob in reply to North
          Ignored
          says:

          My point is more general. Big business and big finance have goals that are not mindful of a strong middle class. The current situation is sufficient evidence of that. I’ve never bought the “trickle down” theory any more than I believe what’s good for GM is good for the country.

          Here is Simon Johnson on the finance industry:

          “But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.”

          http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/

          If one buys the argument that financial interests are fighting “reform” to correct the situation its seems that labor unions, the middle class in general, should have an interest fighting for reform. In short, oppose the interests of banks, brokerage houses, hedges funds, etc.

          A lot of New Deal legislation was was designed to regulate finance. I don’t see any reason that labor should not have a natural antipathy to financial interests today just as the did in the the 1930’s.Report

          • Avatar 62across in reply to Bob
            Ignored
            says:

            I think your general point is key. Labor is an oppositional force to the financial sector to the extent that stronger Labor means a stronger middle class. I don’t expect you mean that strengthening Labor is the only way to strengthen the middle class, though correct me if I’m wrong.

            It is the stronger middle class that is needed as a counter to the financial industry.

            I’d add, per your link, that talking about how to do anything to reform the financial sector is moving to Step 2 without covering Step 1 – breaking what Johnson calls the financial oligarchy. The cozy relationship between the financial sector and the government brought us the bailouts and then have effectively held the pitchforks at bay with a relatively weak FinReg bill.Report

            • Avatar Bob in reply to 62across
              Ignored
              says:

              and North, I don’t wish to speak for E.D. here but I think I’m coming from his general starting point. Erik points out, “…I think there is a compelling case to be made that a really vibrant, stable middle class requires some sort of resurgence of the labor movement.” All I wish to add, from Erik’s mouth to god’s ear.Report

          • Avatar North in reply to Bob
            Ignored
            says:

            Maybe that works. I think you’d have a stronger case if you left labor out of it entirely and focused on the Middle Class. We’ve seen a lot of situations where the attitudes and interests of labor are hostile to or at odds with the interests of the middle class.

            Beyond that though I agree with 62across. How to break the regulatory capture is a difficult nut to crack.Report

    • Avatar Kolohe in reply to North
      Ignored
      says:

      As to your general question, I don’t know if there are natural opponents to the financial industry like the natural opposition between labor and management.

      It was for most of history, social conservatism. The Abrahamic religions all have rules governing the money business, in some cases banning it entirely.

      In American history specifically, that the Republican party currently has the bulk of the more religiously observant (christians) as well as the bulk of Wall Street is a historical aberation.Report

  5. Avatar DensityDuck
    Ignored
    says:

    “But I have a question: how does organized labor work as a counter to the financial industry?”

    How do beans work as an answer to crocodiles?

    Organized labor doesn’t work as a counter to the financial industry because the two have nothing to do with each other. The “capital/labor” distinction which organized labor depends on doesn’t exist in the financial industry; effectively, the market is the boss and every banker is labor.Report

  6. Avatar Bob
    Ignored
    says:

    Who could have guessed?

    According to Think Progress the U.S. Chamber of Commerce plus AIG and ExxonMobil have hired a law firm to smear labor unions and other critics of the Chamber. According to the article the plan included planting false stories the Chamber hoped critics would spread. Then the Chamber could expose Think Progress and others of falsely vilifying the CC.

    http://thinkprogress.org/2011/02/10/lobbyists-chamberleaks/

    Nice to see AIG using their bailout billions for something other than huge bonuses.

    http://en.wikipedia.org/wiki/AIG_bonus_payments_controversyReport

  7. Avatar Christopher Carr
    Ignored
    says:

    I think it’s absurd that so many very bright people dedicate their brilliance to finding ever-more-creative ways to exploit loopholes in the system or to prevent the exploitation of those loopholes. We need fewer financial analysts and wonks and more scientists and engineers. Would simply letting banks fail despite systemic risk do more than anything else to foster this?Report

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