By Jim Harney 8/5/07

Inequality is part and parcel of neoliberalism, globalization, and especially what has become known as “financialization” the key component of the first two.

What’s financialization mean? Gerald Epstein of the PERI institute, at the University of Masssachusetts, says: “By financialization, we mean the increasing importance of financial markets, financial motives and financial actors in the operations of the economy.”

Epstein believes financialization, “is associated with substantial economic costs: increased income inequality; increased shares of GDP going to owners of financial assets, who tend to be among the very rich in most countries; and the short-term orientation of financial investors who, through their power over corporate decision making, tend to undermine long term investment that can be so important for healthy economic development, to name a few.” (My emphasis.)

Financial capital, especially the speculative kind that moves in the area of high risk betting, in the hands of banks, brokerage firms, private equity firms and increasingly hedge funds, holds supreme over industrial capital.

Financilalization of the global economy works to the advantage of wealth accumulators over against wage earners. Financial capital laid industrial capital down to rest in the 80s and it’s become the power of global markets ever since.

A club of billionaires grew by a hundred to 793 last year. CEO-pay skyrockets while worker’s salaries decrease. This dramatic surge just doesn’t happen: it’s structural in nature. The challenge comes to unmask that structure so we see it in all its nudity and posit alternatives to it.

Economic shifts that favor the wealthy occur in Tsunami-like fashion: perhaps the most salient one is the place of hedge funds, private firms that operate in secrecy and beat government regulation. They have much more power than banks and soon will replace them. The “hedgies” — the ones who manage them, enjoy spectacular salaries. The top 25 hedge fund mangers pocketed a whopping $15 billion last year.

We’re talking about Great-Gatsby-like times. James Simons who manges a prominent hedge fund group, Renaissance Technologies, enjoys an income of $1.7 billion: 31 times more than Goldman Sachs’ Lloyd Blankfein who wins first prize as Wall Street’s highest paid CEO with some $43 million; even though this main actor in financial markets makes a whopper of a salary he isn’t even mentioned on the Forbes’s list of the 400 wealthiest people in the country.

According to Paul Krugman NYT reporter, Simons’ salary is 38,000 times the average salary, it’s 80,000 times my salary. There’s an elite growing here who have tremendous power. There’s lots of talk about Blackstone, a hedge fund, surpassing Goldman Sachs that Forbes calls the biggest hedge fund of all; but just recently JPMorgan kicked it off the top as its hedge fund assets increased by 75% to a total of $34 billion. The average Goldman employee makes $500,000, those employed by Blackstone average $3 million.

The AFL- CIO’s Dammon Silvers testifying before the Senate Banking Committee brought home the glaring wealth gap: “In 2006, 25 individuals who manage hedge funds made three times what the 80,000 people who teach in New York City schools earned and yet paid a lower marginal tax rate on the bulk of their hedge fund earnings than those school teachers paid on their incomes.”

“If hedge funds were a country”, writes Jane Bush in the New Statesmen, “it would be the eighth-biggest on the planet. They can sink whole economies” and we’ve certainly seen that happen in Argentina in the year 2001 where the world’s biggest sovereign default took place; we’ve seen it in Mexico, in 1994-1995; and in Asia in the late nineties along with the Russian default. Bush says that “they have the potential to crash the entire global financial system.” Not long ago Long Term Capital Management in Greenwich, CN, a hedge fund that employed 90 people almost brought the system under; it had to be bailed out by New York-brokerage firms at the behest of Allan Greenspan of the Fed. Recently Amaranth, a hedge fund that deals in gas, defaulted for $6 billion. “Yet they are beyond regulation. We should be very afraid,” says Bush.

The Financial Times in a special supplement on hedge funds says hedge funds are “The Masters of the Universe.”

We’re seeing dramatic changes; hedge funds will supersede banks; much more powerful in affecting impoverished countries in a negative way than the World Bank and IMF which are losing their power over emerging markets due to oil wealth and commodities markets that have allowed Brazil, Mexico, Argentina and Venezuela to pay off debts to these financial instructions that have played key roles in breaking down barriers to capital; they support the dominant. Ecuador expelled the representative of the World Bank due to a bank decision to cancel $100 million worth of aid because of a move that Rafael Correa made when he was then Secretary of the treasury to take oil money and funnel it into the informal sector rather than pay off debts to international banks based in the US.

Hedge funds aren’t discussed outside of those on Wall Street. They practically run Washington with their monetary influence on politicians who claim to represent us, those running for the presidency, but more beholding to elites than the American people. They keep their eye out for politicians to support. Hilary Clinton’s daughter, Chelsea works for one. John Edwards was an advisor to one pulling in $700,000; James Simons and other hedge fund heavies attended a Clinton supper costing $4,000. During the 2006 election cycle, executives at the 30 biggest hedge funds made $2.8 million in contributions to political candidates or party committees, almost double the amount in 2000. The WSJ says Carlyle Group, a private equity firm, and the Private Equity Council directed 69% of their $3.4 million in campaign funds last year to Democrats. Private Equity firms are cousins to hedge funds the both of them are highly leveraged. Hedge fund contributions paid off last year when the Senate approved massive movements of pension money into hedge funds jeopardizing workers pensions because they deal in high risk betting and are highly leveraged. The AFL-CIO opposed the deal because its constituency would be placed at risk.

Most US citizens have no problem with the vast inequality that exists in the US according to the Economist last year. The mega-wealthy individuals are usually off the radar screen when it comes to explaining the trials and tribulations that come down hard on working people, the working poor, yet “27% of the wealthiest households — those with more than $25 million — own hedge funds down 38% from 2005” according to Business Week (May 14, 2007). Here’s David Harvey’s take on it in his The New Imperialism he says: “We have to look at speculative raiding carried out by hedge funds and other major institutions of finance capital as the cutting edge of accumulation by dispossession in recent times.”

So these Hedge funds are high risk firms, they employ high return investment vehicles that are aimed at wealthy investors. Just to even think of dealing with them one has to have a million in hand and millions in assets. An institution or individual pays 2% right off to have someone manage an investment. These investors and institutions take excess money and put in high risk markets and then fund managers make another 40% of the profits. The top hedge funds charge this high fee even though fund competition is growing with bankers opening hedge funds at a record breaking speed because it’s where they make double digit profits and there is no regulation.

Hedge funds make big money off of a Wall-Street financial instrument know as a derivative and the many variations of it. Hedge funds cater to one percent of the US population that controls 33% of the country’s wealth. The derivative, an “economics of mass destruction”, or the “crack cocaine of financial markets” or “locusts of the global economy”, or as “among the wildest animals in the jungle” plays a key role in this unprecedented wealth surge. In the US there are currently 430,000 households that have a net worth of 10 million and up and they play casino capitalism with their excess wealth. The Bank of International Settlements that monitors banks revealed that there is $417 trillion worth of notional derivatives in the market as of last year. It’s a huge amount of leverage that given an economic crisis could bring the system down.

The top 10 hedge funds alone in March 2006 had $157 billion in assets; add on ten more funds and it amounts to $200 billion under management. Worldwide, some 10,000 hedge funds, private partnerships that service institutions and individuals, have $2 TRILLION they’re custodians over, equal to five percent of annual world GDP. About 241 of these secret firms control about 80 percent of the industry’s assets under management, about $1.2 trillion worth.

Let’s juxtapose this $1.2 trillion to aid money: US foreign aid amounts to a few billion. The world’s top 23 aid donors provided $107 billion in aid in 2005, 95% of the world total, but will fall to 90% by the year 2010 due to the role of emerging economies with natural resource wealth such as oil. Worldwide most “aid” doesn’t go to impoverished countries either, only about $4 in every $10 of global aid goes to low-income countries. No wonder more children are dying in Africa before the age of five than any previous time. But, in case we get a little uppity: in the US one child in five would stand a better chance of making it in another country other than our own. In the US 35 million people live in poverty, over half of whom are children.

Wealth accumulation and its flip side poverty creation occur within a system that trades $2 trillion a day in financial assets. And here’s where Wall Street created financial instruments come into play due to a revolution in informatics, science linked with the dollar. Hedge funds ignore long-term investment, they loath state planning with the poor in mind as they utilize what’s known as the “carry trade” — borrowing cheap money from Japan, practically at zero interest, convert it into dollars and then invest it in emerging markets in Latin America: Argentina, Mexico and Brazil making double digit profits. It’s a rigged deck with the controllers of finance winning. A mere raise in the US interest rate by the Fed’s Ben Barnanke can cause a panic and withdrawal of money from emerging markets forcing a devaluation in a country’s currency, impacting the poor who have to work longer and harder just to meet a subsistence livelihood. And at the same time the Fed decision forces economies to raise interest rates to attract capital. This happened in May of 2006.

The same happens in our own country; we’ve got more in common with developing countries than we’d like to think. Major shifts of wealth each year into the hands of ten percent of the US population: like a trillion-dollar shift from wage earners to wealth accumulators every year. How does it happen? Where’s the root cause of it? It comes down to layoffs which were the result of Mergers and Acquisitions: Goldman Sachs advised in a trillion dollars worth of M&As. Capital desperately trying to find ways to make profit which means cannibalizing a corporation so that executives make mouth watering salaries and workers get the shaft.

Wealth accumulation can’t be talked about without reference to Mergers and Acquisitions (M&A) that have taken place at an unprecedented scale from 2000 to the present. They bring large scale layoffs: money, profit is the bottom line here, not workers rights, or a commitment to their families or the community. The total value of business mergers and acquisitions in 2006 reached US$3.79 trillion in global mergers, a 38% increase over 2005; this year alone in the first quarter they’ve mounted to more than a trillion dollars, headed toward breaking another record. Goldman Sachs, J .P .Morgan, Citigroup and other financial firms made $6.4 billion advising on the M&As. What’s going on here is that money both in the M&A and the advising that accompanies it generates wealth without any production. On the contrary, job loss takes place: workers become more vulnerable.

Those who control financial capital have more power over economies than central banks. The average sitting time of capital in a country is around two to three months. This “hot money” dominated by financial speculative capital can pull an economy to shreds: the Asian meltdown in the late nineties illustrates this; millions of people fell into poverty: overnight!

All this is possible because there is a faith in the market that glosses over the human face, eclipses any sense of economics as having to deal with the things of the house; things that allow human beings to stand tall, be in relationship with one another. On the contrary as Frey Betto, a Brazilian liberation theologian puts it: “All our systemic logic offers worship to the market, private property, money, growth of the GDP, increase of exports, fiscal rigor without the least concern for those without land, without a home, without schools, health care and without identity.”

Something stinks in the US which holds first prize as the most unequal of industrialized countries: swaths of inequality cover the country. Economic choices that favor financial capital, especially the predatory kind have almost wiped out the middle class. The gap widens between corporate wealth and workers salaries.

Corporations enjoy double digit profits while workers salaries plummet, even though workers produce more than they have in decades gone by. The top ten best paid CEOs’ salaries illustrate the divide with a ratio of 785 to 1 over the person who works in production in the year 2000. The medium ratio up to 2004 is 300 to 1. However you look at it, workers aren’t making it.

While we’re talking about ratios let’s add another one that deals with leverage, in other words debt, companies thrive on debt these days because there is a market full of liquidity, a lot of it coming from a Chinese surplus of over $1 trillion; then pension fund money and the money earned off of credit card debt. A recent WSJ article points out an alarming concern about overleveraged hedge funds and financial firms such as Goldman Sachs. An average leverage is a ration of 15 to 1; however, Goldman has one that is 25 to 1. Just recently JPMorgan bounced Goldman Sachs out of the firm most invested in hedge funds. Its hedge fund assets grew by 75% last year to hit $38 billion.

It is not unusual for a hedge-fund investor to control $100m in securities with only a $5m down payment. Of course, that means that when a bet sours, it goes spectacularly wrong. If the hedge-fund industry’s positions in the market are 20 times the cash they actually hold, their potential impact on the world financial system is about equal to US GDP.

Referring to the IPO of Blackstone, Tom Wolfe told CNBC that “We may be witnessing the end of capitalism as we know it.”

The Challenge comes to break down this financilization global Tsunami wreaking havoc throughout the world. We need to speak about it in such a way that folks we know in our communities can begin to storytell about it in their daily lives, articulate how financial instruments now in vogue do dirt to the poor; then organize so that we get to the structural violence and sin that favors capital over labor, wealth accumulators over wage earners, things over life.

Jim Harney works with Posibilidad a nonprofit based in Bangor Maine.