The Damage Wrought by the Great Big Horrendous Financialization Ka-blooie is Real. But this was (and is) Part of a Great Change.
My friends, there’s no doubt we live in interesting times.
This isn’t just a recession when budget sheets show big gaps, then the economy dips into a deep lull and then comes back up, nor is this a systemic economy-is-grinding-to-a-halt like the Great Depression. This, ladies and gentlemen, is a massive revolution politically, socially, economically, and especially technologically, that’s been building ever since the advent of personal computing, the Internet, and all it’s wrought…
This is The Great Change.
In the latter part of the ’00s, the first decade of the 21st century, The Great Recession occurred as a byproduct or baby steps of The Great Change. The ongoing changes caused a crash, hit a wall once the technological ability of the powerful to gain enormous wealth outpaced the economy’s ability to compensate and cope, and the entire world suffered a breakdown.
By “technological ability of the powerful to gain enormous wealth” I’m referring to new financial techniques impossible with the approaches, technology and computing power of previous generations, such as complicated mortgage-backed securities and “robo-signing” forgery-factories that fed mortgages to the beast, these weird securitized mortgage investments—for example CDOs (collateralized debt obligations)—and algorithm-driven high-frequency trading that capitalizes on millisecond price differentials… stuff like that. These exotic financial thingies are innovations, but innovations in the way Frankenstein’s monster was… demonstrating awesome new capabilities but creating potentially horrible consequences for the wielders of these new powers and the wider society affected.
This economic breakdown—see subprime mortgage crisis of 2006-’09 and big financial meltdown of ’07-’08—was and is bad. The worst of the tailspin occurred prior to Barack Obama’s inauguration in 2009, and there were many contributing factors. Jeremy Rifkin and other economic thinkers stress the spike in energy prices and peak oil as the financial meltdown’s main causes, and I don’t think the role of the energy economy and other triggers should be overlooked. But the predominant view is that the crisis in finance was directly related to problems within Big Finance, and that the financial crisis happened due to the house of cards of exotic securities and over-financialization toppling. Global financial markets began to realize that these mortgage-backed securities, rated AAA, were, in actuality, more like FFF, jumbo-stuft with FAIL. Many of these exotic securities were failful—full o’ fail, made up of mortgage scams: financial instruments that were essentially a Ponzi scheme composed of Ponzi schemes. Think of gold-plated Russian nesting dolls with one toxic waste after another making up the inner dolls.
As the big money guys inevitably figured out they were holding financial hot potatoes, the dash to sell these toxic assets (and the related rapid devaluation of same)was devastating. Wall Street partied like it’s 1929, leading millions of businesses, individuals and 401ks to lose their shirts in the stock market.
The MTA, the transit authority that gets people to work on trains and buses and has such centrality in the socio-economic life of New York City, became a poster boy for bad bets of this type when, subsequent to the subprime dominos falling in 2008, hundreds of millions the MTA sunk into an elaborate scheme run by shady Irish and German banks involving ballooning variable-rate debt and CDOs evaporated in short order. The MTA also lost bazillions in auction-rate securities in 2007, getting played by Citigroup and Goldman Sachs in a classic rat guano sold as filet mignon-type game. Suddenly, the transit lifeblood of NYC was experiencing painful sclerosis. Fares and fees were abruptly raised. Other gov’t entities, from transportation agencies to state pension funds, even public school boards, from sea to shining sea, got similarly swindled by promises of AAA, low-risk investments.
The Great Big Horrendous Financialization Ka-blooie had a catastrophic impact. It’s tough to overstate the damage. Nine million Americans lost their jobs. Lost output—goods and services that should’ve existed given expected economic activity but didn’t exist—”was at least 40 percent of 2007 gross domestic product and probably considerably more,” according to the Federal Reserve Bank of Dallas (source: BloombergView).
But the financial crisis is the byproduct of a bigger bad. It’s a severe episode in a longer bout of disorder, it is part of death and rebirth in the goddess of destruction sense of rebirth. The Great Recession is one piece, wrecked by human failty and greed, economic catastrophe but nonetheless part of a greater nexus of processes that are ongoing: The Great Change.
I see this as like puberty but more perilous, not as a disease we could cure, though the official gov’t line is that we’ve overcome it and our inexhaustible awesomeness makes us only better than before. Most misunderstand.
The economic fail is merely a symptom, one part of the massive changes in every facet of life (economically, socially, politically and technologically) rapidly spinning all around us. I’m arguing that this is “The Great Change,” an unprecedented reconfiguration of the socio-economic arrangements of humanity. The old economic and social order is to be shed like a cocoon.
This brings wonderful opportunities and great dangers. The potential for horrific consequences in the meanwhile is clear. The powerful and entrenched have near-infinite ways of abusing the transition and its uncertainties, as the Great Recession exemplifies. According to a recent study surveying HR managers globally and examining relevant trends to gauge the future of work by 2022, an Orwellian nightmare but with corporate “ministates” running society, not unlike the corporate cyber dystopia envisioned in Neal Stephenson’s Snow Crash, may be inevitable (source: Yahoo! Finance).
Futurist, economic theorist and writer Jeremy Rifkin highlights exciting opportunities coming with the new revolutionary Internets and their zero marginal cost paradigm spreading to multiple areas of the economy, the core of The Great Change I’m talking about.
Marginal cost means the costs necessary to produce an additional +1 of a thing or service. For example, to copy an additional Kindle eBook for you to read, it’s as near-zero marginal cost as it gets.
Rifkin acknowledges {though never emphasizes) how entrenched interests stomp on ordinary workers as they try to get labor costs, e.g. the wages of service workers in fast food and such, down as close to zero marginal cost as possible.
He envisions the new laterally-networked sharing economy, the Collaborative Commons expanding enough to provide an ample alternative. But without 3D printing leaping so far ahead they become like replicators on Star Trek, thereafter pulling the cost of living down to near-zero marginal cost as well, I don’t understand how this sharing economy works. It would require a totally new economic engine as unlike capitalism as Star Trek‘s economy.
I totally dig Rifkin’s vision of capitalism being eclipsed, supplanted by a Collaborative Commons wherein all information, entertainment, handmade schematics for 3D-printed items of every type, and soon even energy is shared in lateral networks at near-zero marginal cost, and I really want humanity to get there in my lifetime. Rifkin sees the new sharing economy revolving around care, empathy, quality of life, people freed from menial and repetitive labor that the AI of the not-distant future can do. The problem is getting the human economy, as corrupt and enormous and unwieldy as it is, from point A to point B. We need to get there. We have to get to a new, better economy if future generations are going to have any type of survival.
Really we’ve already departed from Point A and are well into this transition, since so much of the world economy has been transformed/devastated by the encroaching near-zero marginal cost reality, even energy, with the increasing availability of renewables soon will be near-zero marginal cost after up-front installation. French investment bank Kepler Chevreux released a new analysis last month projecting solar and wind to yield more energy return on investment than oil by the 2030s at the latest, and you look at their numbers and they are low-balling how soon solar panels get dirt-cheap… if we get liquid-like organic photovoltaic cells that are “paintable” on any surface at low cost, that changes the calculations enormously.
Already, Germany is setting up an energy internet, like with social media the users produce the content, the users produce energy from the solar, wind, and geothermal on their property, massively store it for use when the sun isn’t shining, and share it on the energy internet. China is going long investing in new renewables technology and a similar internet of energy. Meanwhile, the U.S, is doubling down on hydraulic fracking, and no decentralized energy internet is in the works.
I led with the Wall Street shenanigans for a reason – if we keep having economic meltdowns because everyone’s been bamboozled into investing in turd-backed securities and lost their nest egg, if the bottom 90% can’t afford anything, that is bad. Rifkin has a much more trusting and sunny view of industry than I do. These pitfalls are problems now and could easily get worse.
It’s really important we get to Point B and not get stalled, derailed, ending up in an economic cul-de-sac of dystopian corporatism with a predominantly roboticized industrial and service sector that feeds an ever-more opulent, powerful and entrenched 1% most of the GDP while the increasingly powerless 99% starve.
To his credit, Jeremy Rifkin stresses the risks losing net neutrality, losing a safe climate, or losing potable water can pose: there’s no progress if we cut our legs off. Food and water will continue to be big issues. And it is unclear how ordinary workers will earn enough to keep the consumption-based economy going…
Notice on the income line graph, the 2007-09 Great Recession happened alongside a dip in the 90 percent’s income. A similar drop in the vast majority’s share of the income pie shows up on the line graph for 2013-14, indicating we may be in another recessionary pattern RIGHT NOW.
In order to have hope, we have to first understand where we are. Where we are is near-zero marginal cost affecting every nook and cranny of the global economy. Where we are is the old economy is long dead
and not coming back, easy to get factory jobs aren’t coming back. American-run social media sites (Facebook et al) are already WAY more profitable than the entire U.S. automotive sector.
We’re heading into a presidential primary cycle where the Hillarys and Romneys of the world will be constantly lying to you that, if you just make them president, old economy jobs will rain down like manna from heaven, that they will bring renewal, belief, optimism back to America and just from our exceptional spirit, from really believing in ourselves, our inexhaustible economic dynamism will subsequently reactivate. These are lies, some of the most intellectually dishonest claptrap you’ll ever hear. These are political and spiritual snake oil salesmen. No miracle can bring back the old Laverne & Shirley beer plant.
We have to create a totally new economy, and I haven’t heard any creative ideas on that front from our sucktastic political class. Our awfullicious DINOs and RINOs don’t even address near-term economic crises like how the vast majority of workers will keep consumer spending up, so enthralled are they with the perverse logic of “winning” the news cycle and appearing relevant next to whatever dumb sensational headline. How the new economy will work, how we get away from our dependence on consumption, replacing old economy consumer spending as the central pillar of our economy; these issues should be foremost.
One possible driver of the new economy could be the social media bonanza spreading the wealth to its users/content-producers, something like reddit’s CEO proposed on Tuesday, giving redditors 10% of reddit’s stock via online cryptocurrency (meaning cryptography-secured and generated digital medium of exchange). Probably they’ll use the extant reddit currency, reddit gold/creddits, but make it exchangeable with other cryptocurrencies
like Bitcoin and the hilarious dogecoin, in addition to old currencies: USD, the Euro, Renminbi and so forth. This reddit idea, assuming it doesn’t fail before getting to the launch pad, would mean the dispersal of millions of USD to kick off a new market economy – countless new micro-economies taking off….
But even with wild success of new markets, and all the new economy’s opportunities, there are perilous days ahead. Especially for people living day-to-day with chronic illnesses and severe disabilities and all the related health care costs, competing in an economy of near-zero marginal cost poses terrible challenges. Simultaneously, virtual economies open up new egalitarian market spaces, participation possible regardless of physical abilities or identity.
Meanwhile, what happens to the vast majority of ordinary workers?
Some ideas for consideration:
Jappe suggests hyper-local and international cooperative economies above/outside of the logic of corporate capitalism as a way to outlive the old economy. See: What will we do if the system can no longer create jobs? An interview with Anselm Jappe
One alternative currency idea, and many will be needed – Video: The Hero Reward System – A Complementary Economic System Based Upon Merit
If you want people to keep consuming, something like this may be needed for people to survive the transition – Video: Basic Income – An idea whose time has come | Basic Income Europe
We’re all living through “The Great Change.” It’s going to be both wondiferous and horrifying. Spread the word.
Nick
Recommended resource:
Video: Jeremy Rifkin: “The Zero Marginal Cost Society” | Authors at Google