Hi, Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on… Today I’m going to write about how private equity is reacting to the pandemic and the bailouts. PE is heavily indebted, and therefore is at high risk in a shock. I’m going to explore PE’s vulnerability, and how the industry is engaged in a political strategy to repurpose the Federal Reserve to its ends. I’ll also explore whether their strategy can work.
I see this as a late stage in the collapse of empire. Our elite are merely engaged in kleptocracy, looting, graft, so insulated in their mythology that they believe themselves on some level to be the great benefactors of the society, even as they hollow it out and destroy it. Yet no matter how much I point out the corruption to people, those in thrall to the Trump or Obama/Clinton/Biden fail to even acknowledge that a bailout of these crooks is happening. Corporate media including NPR are engaged in hiding that fact, or rather talking as if the entire bailout is directed at "workers". It seems what most people engaged in either party want is a restoration of the status quo, and nothing else will do and nothing else can be discussed.
I am hoping this crisis leads to a national conversation about producing more essential products and food locally, with a focus on meaningful, dignified and well compensated work for people engaged in rebuilding that local economy. Rethinking how we treat the land and waters while becoming a productive economy again, less a consumer economy. It seems to see we could have a very beautiful, dynamic, more "tribal" society that is also global.
If you give everyone an account at the FED, then banks no longer have any leverage as so-called guardians of the payment system in case of a default. It would effectively end too-big-to-fail in an instant. Then if the FED refuses to provide liquidity without conditions, it could eventually buy up every bank that engages in risky behaviour for zero dollars, as banks only function with an lender of last resort which protects them against a bank run. (There is no rational case for large private banks, only for small private banks.) The FED can then break up these banks at will and Congress could vote a bill like Glass-Steagall so any risk-taking is never bailed out. A return to sleepy banks and easier times.
Then the Treasury can guarantee pension funds a high return without any risk of default.
Then i wake up.
The Fed's policies do more than boost PE. They encourage reckless borrowing of *all* kinds. The magic moment when Greenspan tipped the Fed's hand was during the 1997-98 crisis, which was a financial crisis in Latin America, Asia, and Russia created by the then-new globalized "hot money" flows. The Fed lowered interest rates considerably, provided special liquidity facilities (and again for the largely imaginary Y2K crisis) and helped to organize bailouts, most notably of Long-Term Capital Management, a hedge fund, which owed a lot of money to major Wall Street investment banks.
The striking thing is that the *American* economy was doing well at that point, with strong growth and employment. But the die had been cast, the paradigm shift stamped on history, on the day in 1987, after a large correction in the stock market (which had gotten way ahead of itself at that point as it recovered from its 1970s inflation-era lows) was hysterically misrepresented by some as 1929 all over again. As the new Fed chairman, Greenspan made it implicit but clear that the Fed's new, unspoken mandate was propping up asset values (no matter how overvalued), not tracking the real economy of goods and services and the banking system that is supposed to serve it. Volcker, the Fed chair from 1979 to 1987, would never have done this and, when presented with the opportunity, did not.
But Greenspan set at least an expectation, a change in orientation. The full flowering of this new orientation would take more than a decade to play out, however. In 1987, Greenspan was still (wrongly) viewed as a tight-money man, a quasi-gold bug. (He had shed his Ayn Rand, hard-money past in the 1970s, as he started to slither up the greasy pole of power in Washington.) It was Volcker who had led the defeat of inflation in 1979-82, through selective application of monetarist ideas to slow the too-rapid growth of money and credit in the late 70s. He applied those ideas just long enough to do the job, then abandoned them.
OTOH, from 1987 to 2006, Greenspan invented a whole new policy framework (which forerunners going back to the 18th century) of ultra-loose, fiat credit expansion, with large banks and the new shadow financial institutions as the beneficiaries, but also fitting into political agendas of the 1990s and 2000s that promoted cheap credit to the masses for college and mortgages. Extra dollars were also deliberately pushed to flow outside the US ("dollarization"), whence they flowed back into the US to purchase US-dollar-denominated assets and prop up financial assets (bonds, stocks) and real estate. (This was falsely presented as a "savings glut" -- it was actually a dollar glut.)
The result is a massively indebted society whose growth is being strangled by the need to service existing debt. This is a major reason (along with declining money velocity) why fiscal stimulus no longer works at all except in a limited way for a short time. The monetary stimulus effect, broadly, worked well only in the 1990s and 2000s, before the financial crisis, before society and retail lenders had become leery of loose credit standards and when society as a whole was less indebted than it is now.
Back to the 1998 crisis. With the new paradigm in place, the "Committee to Save the World" (that Time magazine cover in 1998) of Greenspan, Summers, and Rubin set about to arrange private bailouts of LTCM and other institutions, while also openly and dramatically easing monetary policy, at time when the real economy in the US did not need it. That in turn set the stage for the final frenzy of the 1990s tech boom in stocks, from late 1998 to the spring of 2000. (You're seeing the same thing with the post-March 2020 monetary and fiscal stimulus that is indiscriminately flooding money into areas of the economy that don't need it and shows up in continuing asset inflation -- now it's bitcoin, NFTs, etc.)
A lot of this is explained, in a less inflammatory way :-), in Sebastian Mallaby's biography of Greenspan, where he puzzles over Greenspan's evolution away from hard money (fixed money supply) to monetarism (money supply growing at a fixed, moderate rate) to arbitrary, open-ended, unlimited creation of fiat credit and the mushrooming of a new, fragile, boom-bust system of privatized gains and socialized losses (with high risks tacitly backed by the Fed, with a wink and a nod). The penultimate stage of this was aimed at the larger society in the 90s and 00s, mainly through college and mortgage lending, but since the finance crisis has narrowed in benefit to only asset-owners (homeowners and 401k holders, of course, more modestly, but far more, the finance class).
Matt's more left-wing perspective emphasizes the lopsided power relationships that led to the current situation, the way in which the Democrats were captured by Wall Street as part of Clintonism (not unique to the US -- the same mutual capture of finance and center-left parties happened in Canada, Europe, Israel, and parts of Asia). This perspective is true, but not the whole truth. To fully understand it, you have to see the origins of the current era in preceding era of rising, then falling, inflation and interest rates. It was that high-inflation era that led to, for example, the deregulation of the highly-regulated savings and loan industry, in desperate search of high-return investments that would beat inflation. Each bad policy has led to crises met by more poorly conceived policy changes that set the stage for the next crisis. And that doesn't touch the grand, generational mistake of the pell-mell globalization that started in 1992 with the proto-NAFTA, which laid us and the rest of the world wide open to epidemics, supply-chain disruptions, and general societal chaos. It's not the world that your older readers who grew up in the 1960s and 70s remember. We had domestic turmoil then, but it was domestic; we had functional parties then, with clear lines of political accountability, when political debate over such issues had not yet been hysterically delegitimized and demonized. In the 1990s world of technocracy here and in Europe, there's no accountability and parties fading as vehicles of popular input and consent -- hence conspiracy theories and extremist groups as natural results.)
(In spite of my differences with Matt's politics, I want to commend him and his work very strongly, if for nothing else, just documenting the warped economics the our overglobalized, overleveraged, too-"efficient" era. There's efficiency in the narrow, linear sense -- often fragile, highly tuned, and not resilient -- and efficiency in the broad, nonlinear sense, resilient, robust, and "anti-fragile," ready for the occasional "black swan." But there's more to Matt's writing that really explains things -- to an audience outside the libertarian, hard-money, anti-cronyistic right that is familiar with these critiques -- like the Cantillon effect and the undue political influence of monopolies.)
I'm in IT and I've been seeing that ICANN, the non-profit owner of at least some top-level domains, has been planning on selling the ".org" domain to Ethos Capital, described as a PE firm. The CA attorney general, among others has been vehemently opposed to this. Have you heard of this proposed sale ?
The article went to great length about bailouts and the bad Clinton/Obama/Pelosi. The de-regulation during Reagan and Bush is only briefly mentioned. Perhaps it is worth looking for the source of the fire first?
"stiffing landlords and refusing to pay rent on its stores"
If those landlords go bankrupt, what are the odds that they might look like a good PE-takeover target (assuming they aren't already owned by PE)?
Thank you for this blockbuster of an essay.
You don't burn down the restaurant if it's the only place to eat-eat at all, period.
Unless you don't really live there.
Unless your plan is to be on the beach, collecting 20%.
Which is the entire script.
Congratulations Hans Gruber, you have won at last.
This is fascinating, scary and deeply disturbing. I work on healthy living cities and communities (a combination of health, care and property development. There are signs of investment taking Social Impact and the green agenda seriously but too much of it is badging rather than real. What is your view?
Something I can't understand is why bankruptcy courts don't slam the brakes on this. If an individual engaged in such blatant self-dealing, they would almost certainly get nailed for fraudulent conveyance. Is it because bankruptcy laws have been shredded into oblivion? A double standard for corporate vs individual? Are courts so corrupt they are no longer treat all litigants equally, or even able to distinguish right from wrong?
To me it seems obvious the quality of jurisprudence has dramatically declined in the last several decades. By courts at all levels packed with clearly biased pro-corporate anti-consumer judges, mandatory pro-corporate arbitration, a supreme court that essentially legalized political bribery. Even plain English statutes are interpreted in bizarre ways that completely defy common sense.
Your early description of the looting strategy, ".... amounts to a sophisticated version of having a limited liability corporation borrow money, pay it into the private account of the owner, and then default on its debt." reminded me a lot of Trump's Atlantic City casino fiasco.
First time reader, I really enjoyed this piece! It was both interesting and informative, I'll definitely be checking out some of your other content. However, I can't help but notice multiple glaring issues with the writing here. There are more than a few blatent errors that should have been caught, as well as a few subtle things that could be adjusted to give you an even better piece of writing in the end. I'm just some dude on the internet, but I think if you hired a solid editor your content would reach a whole new level and your credibility would increase sharply.
I'm just a regular joe but your posts piece together an angle on the 70s and 80s that I haven't really seen discussed. Thanks for your intellectual contribution!
Good job, the article was on point, I wonder if it's me that I miss something but how a $35 billion provision will cover the big bank loss, some media talk about a fortress, personally I see a hole of $100 billion and I'm very generous.
So, 2008, on steroids, during the plague. Good lord. Thank you, Matt, for explicating the sense my gut was telling me to be true. The coronavirus is only round 1 and a lot of ducking bobbing and weaving. The knock-out punches will land in the economic round 2 implosion.
Along other lines. I owe you an apology Matt. My snark got the better of me on Twitter a couple months back. I promise to mind my manners in the future. I value your posts and agree with 95% percent of what you post. The other 5% -- I’ll keep my Webstirring yap shut.
That said, would you consider unblocking @TheRealWebstir?
Thank you for work. It’s vital.
Read this article OMG..
Let's just say it's one of those types of writes ups that suddenly disappear..