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Nov. 14th, 2011 @ 01:57 am in which kevin reoccupies wall street, part two
Most of this post was originally written in response to a question by my former housemate on Facebook on what Wall Street actually does. It summarizes what I spent this afternoon telling the protest camp at Zuccotti Park today. He requested that I post it on a blog somewhere, so here goes.

The intended purpose of Wall Street is to democratize investment. Before the 20th century, there were only two feasible ways to raise the capital necessary to start a business: a) start from a lemonade stand and work up until you can afford a factory (which could take generations), or b) get someone who was already rich to lend you some money. That effectively made the rich an invitation-only club which the average Joe would never have a chance of joining. The original idea behind the Wall Street stock market--at least as espoused by the New York Times and many of its other proponents at the dawn of the twentieth century--was that instead of asking your rich uncle for a loan, you'd ask random members of the public, who'd each pitch in a little pocket money, which would add up to enough to buy a factory right away, and once you had that factory going you'd be making enough profit to pay back everyone who lent you money (and then some).

Wall Street was actually really successful in that regard--it's one of the ways America's culture of innovation developed, as it makes it relatively easy for any inventor with a new idea to turn that idea into a business, with relatively little personal risk. Where things went wrong was when Wall Street brokers realized there was more money to be made by buying and selling shares rather than keeping them--thus gambling on the fate of companies rather than investing in their success. Banks, which already had huge amounts of money to lend, quickly joined in, which is one of the ways ordinary folks lost their entire life savings for seemingly no reason when Wall Street crashed during the Great Depression. The Glass-Steagall Act of 1933 was supposed to prevent that from ever happening again by forbidding banks from participating in such activities--until parts of it were repealed in 1980 and 1999, when some lobbyists successfully persuaded Congress that keeping bank capital out of investment was keeping the American economy from growing as fast as it should. (Which was true....but.)

The repeal of most of Glass-Steagall led to an enormous explosion in derivatives trading--gambling on the fate of companies, instead of investment on the companies themselves. It also tied all the currency, commodities, and foreign exchange markets together into one big mess--which made the economy grow really, really fast through the '80s and '90s (since money could move from any market to another at breakneck speed), at the cost of allowing the collapse of one market (housing) to drag down everything with it in 2008. Housing took down investment banks; without investment banks, there wasn't enough capital to lend to new businesses; without new businesses, the economy couldn't grow; without a growing economy, there was less consumer demand; with less consumer demand there came mass unemployment. Post-crash, Wall Street eased up on the risky activity of funding new businesses--which is the entire point of its existence--and decided that dumping their money into gold or Treasury bonds, which tends to grow in value during a crisis (very slowly), was safer. So...factories close and yet Wall Street gets rich.

There comes a point where folks acquire so much money that having more of it is meaningless--it's literally more than they can ever spend on themselves. At that point, the money stops being what we think of money as being--a voucher for goods and services--and starts being an instrument of pure leverage.

Think about most billionaires. Where do they keep most of their money? In the bank, where they can use it? No. They keep it in securities. Not just because those securities will grow in value, but because owning ten million dollars worth of a stock when a company only has eleven million dollars worth of stock means you own that company. Because owning all the companies in a country's chief export means you control that country's government. There is a limit above which money ceases to be the lifeblood of commerce and becomes a measure of raw power. These are the amounts with which governments and investment banks deal with--far beyond the imaginations of even the commodities traders who actually buy and sell shares in companies. That is where the vast majority of American dollars actually go--not into goods and services, or even into gambling on the fate of businesses, but as a weapon to manipulate the fate of entire civilizations.

As an example, why do you think China is converting so much of its national treasury from yuan into dollars? It's still worth about the same (although it will rise a little if the dollar does well or the yuan does poorly). The reason why is that because our money markets are all so closely interlinked, each dollar becomes less significant as the worth of a candy bar as it is as a share in the entire American economy. If they control a large share of American dollars (and they do), they can manipulate the price of the dollar so that it will always be worth more than the yuan. This is an arrangement that keeps their exports to America cheaper than local goods in America, while keeping American imports in China more expensive than local goods in China. Even if our labor markets had the same costs, China would continue to have an edge (and have more money go into China than into the U.S. in their trade with us) as long as they keep doing this.

Banks do this on a smaller but still staggering scale. Do you know that JP Morgan tried to corner the silver market in 2010? That's right, they tried to buy ALL THE SILVER IN THE WORLD. Not all the physical silver, mind you (your heirloom spoons are safe), but all the absurd quantities of silver being kept in other banks specifically for the purpose of controlling the price of silver. Which is worth around 14% of all the actual, physical silver in the world--enough to raise or lower the global price at a whim. China one-upped them by attempting to corner COPPER--so that yes, any time you buy anything with a wire in it, or any time the U.S. mints a penny, if you follow the money upstream far enough, a little of it would go to China. If the Chicago Mercantile Exchange was still in its prime we'd be seeing crazier shit like countries deliberately driving up the price of all the wheat in the world, or all the corn, for the express purpose of causing famine in their political enemies. It sounds farfetched--but that's exactly why we have corn subsidies in America, to prevent Soviet Russia from driving up the prices of our staple crops in order to cause political instability during the Cold War. Try explaining that to an angry mob. :(

All of this money is being sat on. It's sitting in vaults across the world, unspent and unspendable, for the sole purpose of allowing megacorporations, investment banks, and world governments to play power games against each other. It's why trickle-down doesn't work, it's why "job creators" aren't--because a closed fist with a coin inside hits harder than an open palm. Imagine what would happen if Wall Street--or something like it--actually took all that money out and put it into making things. (Or, at the very least, it didn't take money out of making things to fill up those vaults.)

The thing that disheartens me about Occupy Wall Street is that most Americans don't even have an Econ 101 understanding of economics (which totally should be a mandatory high school course, not an elective college course), much less the slightly more advanced understanding necessary to follow what Wall Street actually does and when and how it is neglecting its original purpose. At Zuccotti Park I met lots of intelligent, educated folks who know dozens of clever ways to fight oppression and pass legislation and change attitudes and challenge social constructions, but not a single person who knows how to take on an investment bank. For a movement that organized around anger at Wall Street screwing most of America over, most of these folks don't know half the ways Wall Street screwed them over. By treating wealth inequality as a purely social problem instead of a socioeconomic one, they're bringing a knife to a gunfight. And it seems like everyone with enough knowledge to help them, enough to guide them into a vision of a post-Wall Street future, is playing for the opposing side.

I went to Zuccotti Park today because I'm not nearly well versed enough in the financial markets to make the change I want to see happen. I barely know enough to describe and explain the problem. I was hoping I'd find someone there who understood better than me, who I could talk to and bounce ideas off of for coming up with a way to bring that 99% number down and that 1% number up, but there was no one. Even the former commodities trader I met said, "I just played the game. I'm not qualified to referee."

It frustrates me that Zuccotti Park sits mere blocks away from where some of the greatest macroeconomists in the world work--people intimately familiar with every ebb and heartbeat of the market, experts at navigating the subtle connections between every lost job, every misjudged diplomatic cue, every trader panic, every traded good in relation to every other traded good. Is there not one of them who will come down during a smoke break and say, "Okay, folks, this is what needs to happen if you want there to be jobs for you again..."?
About this Entry
hiromi
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From:elentiriel
Date:November 17th, 2011 02:24 am (UTC)
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Good posts, but I have a question about the bit when JP Morgan tried to buy the entire supply of silver.

I remember that in the news last year, and the outcry it provoked. My question is that given banks have gold and silver bullion and then some in "abstract" to peg money values to, if a bank tried to buy all the gold in the world, and that some countries have pegged their currencies to gold or silver, then wouldn't a bank own the country's money if the bank was successful in buying all the precious metal?

And you're right about how economics should be a mandatory high school class. I'm glad I was required in the end to take agricultural and environmental economics even if it was more specific than basic econ, but at least I got some basic general econ concepts out of them.
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From:erf_
Date:November 18th, 2011 04:58 am (UTC)
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Yes, they would--which is why countries that back their currencies with gold or silver traditionally keep reserves (i.e., hoard) vast quantities of it. Fort Knox, for example, was intended to house US gold reserves back when the US was on the gold standard. Countries could defeat a run on gold or silver by simply ceasing to sell theirs, and also fill their treasuries in an emergency by putting some on the market again. Their economies would still be vulnerable to other countries (or corporations!) that held more enough of it to override their own influence on market prices.

Nowadays, however, the most common reserve currency is the US dollar. Which the US Treasury does hold in large amounts, and bring out to to control the value of the currency. See quantitative easing.