Picture the overflow outlets through Glen Canyon Dam on the Colorado River, giant 30 foot wide tunnels at the bottom of a six hundred foot wall of concrete. Picture that time in May when the water managers “let ’er rip”, when they loose steely jets of water from those tunnels to replicate the spring runoff that once replenished the river beaches and backwaters and is now banished by the dam.
Now picture your riverside garden fifteen miles down canyon. Picture your carefully dug irrigation trench following a contour across the bank to your tidy little planted rows, the seedlings just peeking above the soil. And here comes the flood, seventy five thousand extra cubic feet per second, raising the river level four feet above your garden. This is the kind of mismatch between capital needs and capital supplies that faces small businesses, municipalities, and local banks when they go to deal with the “giant pools of capital” where most of the world’s wealth now resides.
These vast reservoirs have been accumulating for decades, partly from the natural advantages that capital grants its owners, partly as a result of “supply side” government policies that limited the redistribution of wealth back down to the “bottom” 80 % of citizens. In the U.S. 90% of the total wealth now gathers in those reservoirs, owned by a couple percent of Americans and controlled by a microscopic few. And now, instead of fueling business investment, job creation, and greater wealth for the average folks as promised, the pools have grown too large to serve the small scale investments critical to Main St. at all.
What happens to this ocean of cash, where does it find a home? Well, much of it is entrusted to wealth managers; the hedge fund guys and Mutual fund managers and commodities brokerage houses that can swallow capital in multi-billion dollar chunks. The job of managing great wealth is a profession unto itself, not necessarily related to the enterprises that created the wealth in the first place. Managing large capital holdings is usually not the forte of entrepreneurs and certainly not the baliwick of the second and third generations who inherit giant estates.
These guys (they’re mostly guys) who manage the billions often tend to chase each other from sexy potential investment to sexy potential investment, hoping to get in first and then get out before the accumulating force of their flood of capital sinks the investment de jour. In between the floods they scout out safe harbor for the billions they control, out of harms way when the panicked herd bolts from the next collapsing market. They can only hold on the the money entrusted to them, and the spectacular fees and bonuses that go with it, if they can show these sexy returns and guarantee some sort of safety as well. And it just takes too long, costs too many labor hours and burns too many brain cells to break the multi-billion dollar chunks into the “tiny” million dollar increments that would serve Main St. needs.
You could see this dynamic in the lead up to the Great Recession. Individual mortgages, the kind your bank used to hold, were irrelevant to the giant capital pools. But bundled mortgages, assembled by the thousands into mortgage backed securities, those did fit the scale of investment needed to attract the big money. Mortgage backed securities did pay sexy returns at the interest rates of the ’00s, and seemed to be safe investments as well. Few people ever defaulted on their home mortgages and real estate prices seemed to predictably raise over time. The big money plunged in, their appetite for bundled mortgage bonds was insatiable.
Of course the supply of well documented and secured mortgages was limited. Had regulations been tough, particularly on the private mortgage brokerages, the buying frenzy would have abated and the flood would have diverted in another direction. That didn’t happen though; mortgage brokers couldn’t resist all the fast money in fees, they lowered their standards and then lowered them some more. The mortgage bond bundlers figured out how to mix junk with value, found rating houses willing to certify the compromised bundles as AAA solid gold, for a fee of course. And still they ran out of mortgages to bundle and sell. Capital was still begging for more.
So of course the sharp guys (mostly guys again) figured out how to tempt capital into derivatives like Credit Default Swaps and other opaque investment “products”, heavily leveraged and loosely based on the mortgage market. Then when real estate numbers started to look bad and investors looked to get out, the herd bolted in an epic stampede. What happened during this stampede is instructive.
Signs of decay in the U.S. real estate market were showing up in 2006, by then mortgage backed securities were in trouble and money managers were looking for a safe harbor. Commodities, which were real products like oil and copper, looked like that harbor and capital plunged, the overflow outlets opened. Oil futures, which had been bouncing around at about $50 a barrel trebled in 2007 to $150 dollars a barrel, copper prices led the way in 2006 quadrupling or quintupling; the big money was on the move. Even though production was stable and demand was falling, the big money was bidding up prices in the “real” products offered as futures contracts in commodities markets.
This dynamic has played out in serial bubbles; the “dot com” bubble pumped up when venture capitalists were dropping tens of millions on kids in their twenties who could show a web site address and a concept, the S&P and Dow which went from relatively stable values before the 80’s to rocket fueled ascents and plunges, particularly since 1990. Big capital has essentially constructed a shadow economy, complete with its shadow banking/financial sector, where the big money now hangs out. The risk taking and entrepreneurship here is in ownership, not in innovation or venture start up investment. And even when new ventures do “go public”, when the average investor does get a chance to get in on the ground floor, that floor has first been discounted and pre-sold to the big money, putting them in position to eat the average investor’s lunch at a future date.
Ownership just drains more capital into the big money holdings, it entitles the owners to the profits and dividends generated by big business, the interest payments on consumer borrowing, mortgage borrowing, and student loans. Ownership reaps the harvest of insurance premiums, from medical to business liability and Worker’s Comp, it skims the high cost of drugs and hospitalization. When residential mortgages were defaulting by the millions, big money was there to pick up the distressed properties in cash purchases at huge discounts. Those properties have re-emerged as rentals or have been “flipped” for resale to the average Joe at tremendous profits.
This reality shows why new Representative Ocasio-Cortez’s proposed 70% top marginal tax rate and Senator Warren’s wealth tax make tremendous sense. In 1980, at the advent of Reagan’s supply side revolution, the “bottom” 80% of Americans owned 60% of the national wealth. Had that proportion not eroded to 10% or less, the bottom 80%, essentially the working and middle classes, would have the wealth to fund college tuitions, home improvements, retirements, personal services, child care, elder care, which in turn would fund better paying jobs and ladders from the working class to the middle and upper classes.
Redistribution of wealth has been carefully demonized by the recipients of these decades of redistribution, and the societal diversion dams that moved capital from the vast reservoirs back into the myriad streams, rivers and wetlands of Main St. America have been sabotaged. Unions hold on by a thread, the public sector, which once created good middle class jobs and put a floor under wages is, according to Reagan and his acolytes of these last 40 years, the enemy. We owe tens of trillions in national debt and yet have squandered that money on foreign adventures and tax relief for the very wealthy and now we can’t even afford to replace crumbling bridges and eroding roads. The interest payments on that debt, guess who gets most of that? Definitely not the 80%, though now their social safety nets are in the cross hairs of the “fiscal hawks” as well.
What we need is a good potlatch, but that’s a topic for another essay.