Middle Class Bargain: Trading Wages for Debt

How Big Money Upended America's Economy

Written for FedUpNewYorkers.org

The frenzy of U.S. deregulation and privatization began with President Jimmy Carter. Ronald Reagan invoked laissez-faire capitalism with a religious zeal that today’s Republicans pursue with even greater ferocity, not least because the capitalists pay the politicians for the privilege of being left alone.

The Reagan gospel of free market capitalism was proclaimed in his first inaugural address: “Government is not the solution to our problem — government is the problem.” And the good news was that this president and the Republican Party he led would lift the yoke of Social Security, guaranteed medical care, the right of working people to organize and bargain collectively, progressive taxation and every other abomination of the New Deal from the backs of “freedom-loving Americans.”

Then, to make matters worse, during the interregnum between George Bush the Elder and Bush the Younger, Bill Clinton led the Democratic Party into the arms of Wall Street, raising millions of dollars from the bankers. In return, he took a wrecking ball to the foundation of financial regulation. He repealed the Glass-Steagall Act, which had prohibited commercial banks from owning brokerage firms and insurance companies and gambling with federally insured depositors’ money. The legislation that had kept the U.S. banking system stable for more than half a century was tossed out and we had our first taste of what bipartisanship — Wall Street style — looks like.

The Charge-Card Economy

Until 2008, the illusion of shared prosperity was maintained by substituting debt for the wage increases that workers should have seen with productivity growth. Mass marketing of credit cards was one important factor. Instant and easy credit for cars and other consumer goods, home equity loans, student loans and other forms of debt required little more than a signature. Between 1980 and 1990, the average household’s credit card balance rose from $518 to nearly $2,700. Today it is $7,500. Debt may have made people uneasy, but it kept the party going. With consumers able to spend freely and wages frozen, corporate profits, 80 percent of which come from consumer spending, soared.

State governments also played a hand by allowing bankers to charge loan-sharking interest rates. If states didn’t give them what they wanted, they simply moved their credit operations to more pliable jurisdictions. Thus New York’s Citibank opened offices in South Dakota, and from there it was able to charge its credit card customers, wherever they lived, whatever the traffic would bear.

South Dakota led the race to the bottom, but other states caught up quickly. Usury restrictions fell like dominoes. The legalized loan sharks disguised themselves in nice suits and employed every trick in the book to pick our pockets, imposing penalties for late payments, for instance, and then establishing due dates on weekends and holidays. Unwittingly, people incurred late penalties on top of the usurious interest rates. And that’s just one example.

As working- and middle-class Americans became increasingly focused on the culture wars, Vietnam war protests, drug wars and the general social upheaval of the late 1960s and ’70s, the country was being transformed into a giant company store. The underlying message was: Not enough wages? You can maintain your standard of living — just charge it.

Ugly as it was, the shift from wages to debt was only part of the story. Recall CEOs like Sunbeam’s “Chainsaw Al” Dunlap and General Electric’s “Neutron Jack” Welch, and scores of others who, in the name of “shareholder value,” slashed millions of jobs in the 1990s and walked away with personal fortunes before their companies collapsed. Wall Street and the corporate media hailed them as visionaries. Now, in a throwback to Gore Vidal’s United States of Amnesia, Carly Fiorina, who slashed tens of thousands of jobs and whose tenure as Hewlett-Packard’s CEO is widely regarded as a disaster, is running for the presidency on her corporate track record.


A few prominent Americans who bear important responsibility for wrecking the economy, diminishing the lives of the American working and middle classes and impoverishing so many millions of their fellow citizens.
Top: Alan Greenspan, Larry Summers, Al Dunlap. Bottom: Robert Rubin, Phil Gramm, Jack Welch.


Public Risk, Private Profit

Investment bankers developed sophisticated schemes for securitizing all that debt. Because many institutions could only put their money in investment-grade securities, the bankers bribed and threatened credit-rating agencies with loss of business to competitors unless the agencies slapped triple-A ratings on mortgage-backed securities they knew would default. Then the bankers sold the securities around the world. They booked immediate profits, and the boards of directors they controlled rewarded them with multi-million dollar compensation packages — even though the profits were illusory.

The rating agencies, meanwhile, claimed they were only offering opinions — free speech protected by the First Amendment. After years of warnings from credible sources, the house of cards collapsed.

By the time the Great Recession hit, many of the “socially progressive fiscal conservatives,” the trope favored by Wall Street Democrats to distinguish themselves from their bare-knuckled, radical-right Republican colleagues, had returned to Wall Street from their government service in Washington to collect their rewards. Robert Rubin, Clinton’s treasury secretary, had been a driving force behind the elimination of Glass-Steagall. That move paved the way for the legally questionable merger of Citibank and Travelers Insurance, a $70 billion deal. The new entity, Citigroup Inc., with assets of almost $700 billion and annual revenues of about $50 billion, became the largest financial services company in the world. It was too big to fail — until it did. Citigroup paid Rubin more than $126 million in cash and stock options.

Texas Republican Phil Gramm, the man John McCain called his “economic guru,” was the leading Senate Republican on the congressional coup de grace to Glass-Steagall. He also helped Rubin, Alan Greenspan and Larry Summers kill the effort to regulate and make more transparent the multi-trillion dollar derivatives market. Warren Buffet famously called derivatives “financial weapons of mass destruction,” and indeed, he was right: The Commodity Futures Modernization Act that prevented the regulation of derivatives was a key reason for the 2008 collapse.

Enron, which had substantially financed Gramm’s political career, was given a regulatory exemption that enabled it to rig the California electricity market. It cost the state billions. Gramm’s wife, Wendy Gramm, who had chaired the Commodity Futures Trading Commission, moved on to Enron’s board. Phil Gramm, on leaving the Senate after chairing the Senate Banking Committee, went over to Swiss banking giant UBS.

Gramm rejected the idea that the nation was in an economic recession. In a July 2008 interview, he said, “You’ve heard of mental depression; this is a mental recession. We have sort of become a nation of whiners, you just hear this constant whining, complaining about a loss of competitiveness, America in decline.”

What recession? It was all in our heads. Certainly there was no recession for Phil and Wendy: They made a bundle.

Americans were finally tapped out. The lousy wages for those who still had jobs could no longer support the debt. The equity they had built up in their homes was gone through massive refinancing, and new homeowners who had been sold mortgages they could never repay would remain in them just long enough to allow the scammers to take their profits. Home values disappeared overnight. Ordinary Americans lost $11 trillion in wealth and 10 million jobs. We took the hit and the bankers kept their yachts, their private jets and their mansions.

Ronald Reagan was right after all: Government is the problem, but only because so much of it has been captured by Big Money.

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