In September of 2008, the investment firm Lehman Brothers declared bankruptcy. Shortly afterward, the world’s largest insurance company, AIG, collapsed. This sent the world into a global financial crisis. This crisis caused a global recession, causing tens-of-trillions of wealth loss, it also left 30 million people out of work, and doubled the debt of the United States. As we climbed out of the crisis, income inequality grew exponentially. Although income inequality and wealth distribution in the United States has been a growing issue since the 1970’s — the United States now displays a wider disparity of wealth between rich and poor than any other major developed nation.
It is no surprise that there is a correlation between wealth inequality and financial deregulation. There is a war being waged between the wealthiest 1% and everyone else. Unfortunately, we are too embroiled in blaming each other, instead of doing what is needed to fix the problem. We have an administration that is going to gut financial regulations, which will set the stage for another financial crisis.
Let’s dispel some rhetoric
The poor don’t work as hard as the rich.
You have probably heard that factoid before. However, this just serves to divide us. Saying that a janitor, a fast food worker, or a farm worker doesn’t work hard as a white collar worker is a lie. Everyone can’t be rich and these low-skilled workers shouldn’t be forced to live in squalor. In our capitalistic society, well-paying jobs are the result of someone having an exceptional talent (Or knowing the right people). Since the supply of people that have the skill to run multinational banks is small, their pay is large. That also means that the more people who can do the job, the less that job will pay. We aren’t all “disgraced millionaires”. Someone must do the remedial jobs or society wouldn’t run properly.
Consider this, the average housing wage for a two-bedroom apartment $20.30 hourly. That means that someone earning the minimum wage would have to work 112 hours a week to just pay rent. Per the U.S. Bureau of Labor Statistics, in 2014, 77.2 million workers were paid at hourly rates. Of those 77.2 million, 1.3 million were at minimum wage and 1.7 million fell below the minimum. When you adjust the cost of living by state, the number get much worse – nearly 30% of the hourly wage workers would be considered making at or below minimum wage. So, are we to assume that approximately 21 million American’s aren’t hard workers?
Financial regulation stifles business
One of the constant complaints against regulations is that they destroy jobs and restrict growth. Yet, when we had some of the strictest financial regulations, we had some of the best growth. The rhetoric forces people to make decisions against their own best interest. Inequality started to develop when we introduced less financial regulation into our banking system. After the Great Depression, the U.S. instituted strict financial regulations. In 1980, Ronald Reagan was elected president and said he wanted to, “restore our economic prosperity” as his number one priority. He hired the CEO of the investment bank Merrill Lynch, Don Regan, to be his treasury secretary. Under Reagan, the Garn – St. Germain Depository Institutions Act was signed into law. This act deregulated the savings and loan associations and allowed banks to offer adjustable rate mortgages.
It didn’t take long for this deregulation to create a financial crisis. By 1986 the savings and loan industry had failed. Since this bill allowed for these institutions be treated like commercial banks, they were FDIC insured. When the crisis was over more than 600 billion in bailouts were paid out. That was a loss of approximately $1,500 for every man, woman, and child. The bill also came back to bite us in 2008. Adjustable rate mortgages were identified as a root cause of the 2008 financial crisis. Banks were selling their customer’s a mortgage that they knew could balloon to an unaffordable level. When the rates eventually went up it triggered a mountain of foreclosures. Reagan’s deregulations helped usher in 30 years of more financial deregulations that would enrich the top 1% at the expense of the lower and middle class.
Source: Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data, Emmanuel Saez and Gabriel Zucman, August 2015
Source: Congressional Budget Office, The Distribution of Household Income and Federal Taxes, Figure 11, November 2014
Wealth inequality has only grown since the Great Recession. Fivethirtyeight.com writers, Ben Casselman and Andrew Flowers, said: “In the three years following the end of the Great Recession, the typical American family’s income declined 5 percent, its wealth fell 2 percent…”. Meanwhile, “…the earnings gap between the richest Americans and everyone else has widened”. The 1% are profiting at OUR expense.
As the charts above shows, the 1%’s wealth grew exponentially after each financial crisis – The 1986 Saving and Loan scandal (which ended in 1995), the Dot-Com bubble burst (2000 – 2002), and the 2008 financial crisis. After each crisis, the cost of the bailouts grew. The Great Recession bailout cost us, the taxpayers, approximately $29 trillion dollars. One of, if not the largest, transfers of wealth ever.
Part 2 coming soon.