Ellen Brown suggests that what’s happening now is more class warfare than business cycle….and I think she might have a point.

“Business Cycle or Class War?

Ismael Hossein-Zadehi, who teaches economics at Drake University in Iowa, calls the whole economic crisis a class war. What is being billed as public debt began as the private debt of financial speculators who offloaded it onto the public. The governments that bailed out these insolvent speculators then became insolvent themselves; but the bailed-out banks, rather than lending a helping hand in return, have demanded their pound of flesh, with payment in full. The perpetrators are blaming the victims and insisting on “fiscal responsibility.” Wall Street bankers are dictating the terms of repayment for debts they themselves incurred.

“Fiscal responsibility” means cutting spending, something that is inherently deflationary during a recession, as seen in the disastrous Depression-era policies of President Herbert Hoover. Not that it was solely a Republican error. In 1937, President Franklin Roosevelt also cut public spending, tipping the economy back into recession. Spending cuts cause tax revenues to shrink, which results in more spending cuts. Contrary to what we have been told, national governments are not like households. They do not have to balance their budgets and “live within their means,” because they have the means to increase the money supply. They not only have the means, but they must engage in public spending when the private economy is shrinking, in order to keep the wheels of the economy turning. Virtually all money now originates as bank-created credit or debt; and today the money supply has been shrinking at a rate not seen since the 1930s, because the banking crisis has made credit harder and harder to get.

(Lila: Obviously, I disagree with this analysis of the depression and of government spending and deficits..)

Instead of “reflating” the collapsed economy, however, national governments are insisting on “fiscal responsibility;” and the responsibility is all being put on the states and the laboring and producing classes. The financial speculators who caused the debacle are largely getting off scott free. They not only pay no tax on the purchase and sale of their “financial products,” but they pay very little in the way of income taxes. Goldman Sachs paid an effective income tax rate of only 1% in 2008. Prof Hossein-Zadehi writes:

It is increasingly becoming clear that the working majority around the world face a common enemy: an unproductive financial oligarchy that, like parasites, sucks the economic blood out of the working people, simply by trading and/or betting on claims of ownership. . . . The real question is when the working people and other victims of the unjust debt burden will grasp the gravity of this challenge, and rise to the critical task of breaking free from the shackles of debt and depression.

Working people don’t rise to the task because they have been propagandized into believing that “fiscal austerity” is something that needs to be done in order to save their children from an even worse fate. What actually needs to happen in a deflationary collapse is to spend more money into the system, not pull it back out by paying off the federal debt; but the money needs to go into the real economy – into factories, farms, businesses, housing, transportation, sustainable energy systems, health care, education. Instead, the stimulus money has been hijacked, diverted into cleaning up the toxic balance sheets of the financial gamblers who propelled the economy into its perilous dive.

(Lila: Here again I part company from Ellen, in theory. But frankly, in practice, how can one object? If the government is going to divvy up and allocate, then let the allocation at least be minimally just).

Evening Up the Score

While Congress caters to the banks, the states have been left to fend for themselves. Where is the money to come from to pull off the impossible feat of balancing their budgets? Bleeding a VAT tax out of an already-anemic working class is more likely to kill the patient than to alleviate the disease. A more viable and equitable solution would be to tap into the only major market left on the planet that is not now subject to a sales tax – the “financial products” that are the stock in trade of the robust financial sector itself.

A financial transaction tax on speculative trading is sometimes called a “Tobin tax,” after the man who first proposed it, Nobel laureate economist James Tobin. The revenue potential of a Tobin tax is huge. The Bank for International Settlements reported in 2008 that total annual derivatives trades were $1.14 quadrillion (a quadrillion is a thousand trillion). That figure was probably low, since over-the-counter trades are unreported and their magnitude is unknown. A mere 1% tax on $1 quadrillion in trades would generate $10 trillion annually in public funds. That is only for derivatives. There are also stocks, bonds and other financial trades to throw in the mix; and more than half of this trading occurs in the United States.

A Tobin tax would not generate these huge sums year after year, because it would largely kill the computerized high-frequency program trades that now compose 70% of stock market purchases. But that is a worthy end in itself. The sudden, thousand-point drop in the Dow Industrial Average on May 6 showed the world how vulnerable the stock market is to manipulation by these sophisticated market gamblers. The whole high-frequency trading business needs to be stopped, in order to protect legitimate investors using the stock market for the purposes for which it was designed: to raise capital for businesses. As Mark Cuban observed in a May 9 article titled “What Business Is Wall Street In?”:

Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. . . . My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether it’s through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won’t come from traders trying to hack the financial system for a few pennies per trade.

Besides protecting legitimate savers and investors by exempting stock held five years or more, they could be exempted from a Tobin tax on total stock purchases of under $1 million per year. That would make the tax literally a millionaire’s tax — and a small one at that, at only 1% per trade.

(Lila: I was originally opposed to the Tobin tax because I thought it was being applied across the board. But I think a tax of this kind is infinitely preferable to the VAT….and since taxes we’re going to get, a Tobin tax might…repeat..might…be better)

At the G20 summit in Toronto last weekend, a financial transaction tax was discussed and supported by France and Germany but was opposed by the U.S. and Canada, although nothing binding was resolved. However, the states do not have to wait for the federal government or the G20 to act. They could levy a Tobin tax themselves. Objection might be made that the Wall Street speculators would take their revenues and go elsewhere, but big banks and brokerages have branches in every major city in every state. They are hardly likely to pack up their tents and leave lucrative centers of business. Nor can it be argued that we should cater to the pirates who are looting our stock markets because they are paying us a nice bribe, because they aren’t even paying a bribe. Financial trades do not currently generate tax revenues.

Two Green Party candidates for governor, Laura Wells in California and Rich Whitney in Illinois, have included a state-imposed Tobin tax in their platforms. Both are also campaigning for state-owned banks in their states, on the model of the Bank of North Dakota. People around the world look to the United States for boldness and innovation, and California and Illinois are two of the hardest hit states in the nation. If those states manage to turn their economies around, they could establish a model for economic sovereignty globally.”

Lila: These two additions – making the tax apply only above a certain limit and allowing the states to apply it, to create a diverse economic environment – do make the Tobin Tax a bit more attractive in my eyes. Besides, wouldn’t it be a lot better than a VAT?  I believe it would.

Is there a danger that the financial industry would close up shop and leave the country. Yes. But I don’t think that’s all bad. Maybe the country could use a few other industries.

Isn’t this an unlibertarian position to take? Yes, terribly.

But libertarianism for the poor or powerless and welfare for the rich or connected isn’t libertarianism any more. It’s criminality.  The financial industry didn’t show any will whatsoever to seriously punish the major wrong-doers in this crisis. The whole thing was shrugged off. I was appalled at all the people who rushed out to defend the banks, even those who’d criticized them. Agreed, what we got with Goldman was a show trial. But it wasn’t just the failure of that particular initiative. The same thing happened with BP. It seems corporations should never be held accountable but people always should. We can’t refuse to protect public money from financial predators and then expect people to bear all the costs of the predations.

When we do that, we’ve tacitly placed a stamp of approval on the managerial state. Having agreed to it where it benefits the kleptocrats, we have no moral leg to stand on to object when it benefits the mass of voters.  Thus does the idiotic translation of “self-interest” into “what profits my check-book and nothing more” end up  blowing its own brains out.