On Reality Asserts Itself, Ms. Foroohar says growing inequality and record student, household and corporate debt is creating a dangerous bubble, similar to the lead up to the ’29 crash; the Financial Times columnist and author of “Makers and Takers” says a few on Wall St. see it, but most businesses are doing too well to care – with host Paul Jay. This is an episode of Reality Asserts Itself, produced May 9, 2018.
PAUL JAY: Welcome to The Real News Network. I’m in New York City and this is Paul Jay and Reality Asserts Itself.
Rana Foroohar is an associate editor and global business columnist for The Financial Times. She’s also CNN’s global economic analyst and she joins us in the studio. Thanks for joining us Rana.
RANA FOROOHAR: Thanks for having me.
PAUL JAY: So you just mentioned some reforms that are, honestly, modest. That anybody that actually cared about the systemic health of capitalism, you would think, would want. But I told you, I went to a conference once where Soros spoke. It was about 8-9 years ago at Bretton Woods. And he looks out to everyone, and his first words are, “I’m bewildered.” And he said, there’s such obvious reforms that are necessary to keep this thing going, the system going, and you can’t get anyone to listen to even the most modest reform.
I think that this very objective process of financialization, which was not just a result of policy and such, it was the result of big industrialization. And then the digital revolution. I had a broker I know, used to be a broker, retired, used to tell me that when they used to model financial transactions they had to do it with a pencil and paper. Imagine doing derivatives. So the digital revolution completely transforms the scale of all this craziness, and the power finance already had is exponentially greater. What is it, something like it’s over $300 trillion that are available in the global investment pool?
RANA FOROOHAR: Yeah. It’s several times the size of the actual economy.
PAUL JAY: The GDP of United States is about $18 trillion. Over 300. And that’s not even talking what the derivatives game is, because it’s leverage, but that’s like $700 trillion.
RANA FOROOHAR: That’s right. Many times the actual trading value.
PAUL JAY: And, well, I take your point. You mention in the book and you said to me that there are some rational people on Wall Street. And I’ve met some, we have some mutual friends. They are marginal in terms of having their voice heard. It doesn’t matter how much money they have. And you know, it’s a system where sociopaths rise to the top.
RANA FOROOHAR: That’s actually a very good point. I think that, you know, I’m sure some psychologist has tallied this, but there must be many, many more of them on the street, and in Washington, perhaps, than, than elsewhere.
PAUL JAY: They go together, because one buys the other.
RANA FOROOHAR: That’s right. But I do think, I mean, I’ll tell you a couple of reasons why I think we, we may be at a tipping point. And you know, I know that you’ve said that you think it’s probably going to take another crisis to bring us to the tipping point. That may be so. But one thing I was fascinated by when I put my book out there, I thought that I was going to get calls from people in the business community, CEOs of other firms, saying, oh, thank you, thank you. Someone’s finally standing up to us. Not at all. I mean, the truth of the matter is the C suite of most businesses, no matter what their size, this game works pretty well for them. They’re paid mostly in stock. As long as the markets are good, they’re doing well. It was the very, very high level financiers, and in fact, not just people like Soros, who was supportive of the book. But some hedge funders, you know, people that are just in the markets and see, OK, let’s do the math. Let’s look at developed economies, rich economies, where it’s mostly consumer spending. The U.S. is 70 percent consumer spending.
Most people in this country haven’t gotten a wage hike in real terms since the early 1990s. Working people, working men haven’t gotten one since the late 1960s, really, in real terms. So at some point that math stops working, and that will affect their portfolios. And so they are starting to think about this. Now, that in itself doesn’t effect change. But I also think there’s a generation of millennials, and we already saw their power in 2016 just with the support for Bernie Sanders, who was basically, you know, putting a lot of this message out there in a much more basic and plain way. People saying, yeah, this makes sense to me. And millennials coming out having graduated into the worst job market, and by the way, they’re never going to recoup those those losses. Research shows that when you enter a job market where unemployment is elevated you have that cost for the rest of your life. You’ll never make up that money. Record student debt. Housing prices that they can’t afford, which, that’s another thing. Part of the asset bubble scenario that we’ve talked about is rising housing prices in all the places where there are jobs.
So you’ve got this generation of people, which is now the largest voting bloc, in the country that understand financialization in a really visceral way. They’ve got student debt. The job market isn’t what it was. They can’t afford to buy a house. I think this generation is going to say, we want some change.
PAUL JAY: Here is another quote from Rana’s book “Makers and Takers:”
“It’s no accident that the size of the financial sector today as a percentage of GDP is at levels equaled only on the eve of the Great Depression. Like the decade leading up to the financial crisis of 2008, the Roaring Twenties were marked by not only financial boom and technological wonder, but also massive income inequality. Worker wages stagnated and those of the upper classes grew, bolstered in large part by stock prices. Another similarity was a rise in debt, both public and private, which was used to mask the declining spending power of the lower and middle classes and its dampening effect on GDP growth. Then, as now, when people couldn’t afford to buy, they borrowed—Americans in the 1920s bought more than three-quarters of major household items on credit. Moreover, lured by aggressive advertising campaigns by banks and the proliferation of war bonds, which had been pushed by a government eager to raise funds, the American public began investing for the first time en masse in the securities markets … The basis was thus laid for the vast and credulous post-war market for credit which culminated in the portentous speculation of 1928 and 1929. Sound familiar?”
PAUL JAY: We’re at record debt levels in terms of household debt, corporate debt. China’s debt is stratospheric. You talk about the appearance of a recovery, because of stock market prices. But so much of that stock market boom is because of these corporate buybacks fueled by practically zero interest rate money that the Fed is feeding into the banks. This all sounds like a bubble, like a house of cards, again. How fragile are things?
RANA FOROOHAR: Well, they’re pretty fragile. I mean, you know, debt is always the biggest indicator of financial crises. In fact, as a financial markets person I look always, where is the debt going? Because it’s kind of like water, you know, it will always find the cracks. And so if you look pre- 2008 debt was held in the biggest financial institutions and with U.S. consumers, and that gave us the housing crisis. And then consumers started saving. Banks offloaded a lot of their riskier assets. So where did that debt go? Went to China. Went to the public sector. There’s almost $60 trillion more outstanding debt out there in the world right now than there was before the financial crisis. But the difference is most of it’s being held by governments, because they had to take the hit following the financial crisis with these bailouts, and with the, the recession that of course hit tax, tax revenues.
So at this point I think that you can see that playing out in two ways. One, very polarized politics. If you think about what we need to really retool the economy in the 21st century, it’s a revamp of education. It’s better public infrastructure. But governments don’t have the money or the clout right now to make those investments.
PAUL JAY: We, we’re from a city, based in Baltimore, where most of the schools, or a lot of the public schools, don’t have heating in the winter and air conditioning in summer.
RANA FOROOHAR: Yeah. I mean, it’s, it’s such a destructive thing. So that’s one of the areas that you’re going to see the crises playing out. That’s a political crisis. Student debt is another area where I think it’s really, I don’t even want to call it a slow-moving crisis, because yeah, this is something that’s going to play out over years and not months. But you see people like Bill Dudley, who runs the New York Fed, saying, I think that the amount of student debt is actually going to compress consumption going forward for the next 10-20 years. And that’s actually going to have an effect on interest rates. So that’s a, that’s a big one. Corporate debt is another big deal issue. We talked a little bit earlier about Apple issuing all this debt to do buybacks, keeping tax money over in overseas bank accounts. Corporate debt is at record levels. All companies have been doing what Apple does, so they’ve run up these debt bubbles. And when interest rates eventually start to rise, as they are already starting to do, that debt becomes more expensive. And then you may find zombie corporations that are really not able to even service their own debt load. And what will that do to the markets?
You’ve already seen a couple of wrinkles in the last couple of years when the Fed decided to pull back from quantitative easing. And then when it was clear they were going to move from essentially zero interest rates to starting to normalize. You saw blips where there were corrections in corporate debt and junk bonds, in emerging markets and commodities, areas where there’s a lot of debt.
PAUL JAY: The Republicans have always supposedly been the debt hawks. Now just passed a budget that’s going to have an enormous increase in the deficit and the debt, and nobody seems to care.
RANA FOROOHAR: It’s stunning. I mean, there’s so many things in the last year that have been stunning politically, but Republicans have lost any high ground in terms of being debt and deficit hawks. I mean, this, this budget is, it’s Reaganomics on steroids, actually. Because, you know, one of the great myths, frankly, of the Reagan era was that the Reagan administration was fiscally responsible. I mean, they cut taxes, but they didn’t actually cut the budget, you know, which is why we had, and particularly in the second term, deficit levels starting to rise. So I think that’s exactly what you’re going to see this time around, as well.
PAUL JAY: Well, we’ll pick that up in the next segment. Please join us for the next in our series of interviews with Rana Foroohar on the Real News Network.