Once I had a discussion on Indian economy with an Indian-origin US-based MBA who lived in Silicon Valley, California. When I explained the reason behind the demise of job growth in India, saying the massive privatization by the government had reduced the purchasing power of millions of Indians as in low category jobs, workers are paid much lower than in similar government jobs. For an example, a car driver gets only say 10,000 rupee a month in Delhi (5,000 rupee a month in state capital like Patna and 3,000 rupee a month in sub-divisional towns) in a private firm whereas a similar job in government fetches 30,000 rupee a month; the owner or the shareholders of the private firms, which are providing the privatized services to the government, are making millions and billions. Like brain-washed Americans, he said that being a tax-payer, he did not want a driver to be paid 30,000 rupee (taxpayer money) a month when a private firm could deliver the same service for 10,000 rupee a month. Then I gave him the following example:

 

Nearly entire catchment area of Brahmaputra river is in China whereas India and Bangladesh gets all the water. Therefore as per his theory, India and Bangladesh should not object if China diverts all the water of this river to its massive desert areas in the north. It is worth noting that the economies of several Northeastern Indian states and Bangladesh are dependent on this river.

 

Then he agreed that the government should intervene to make level playing field for both rich and poor.

My last article was against the coal industry privatization (please read: Niti Aayog Policy Papers are Death Certificates of the Indian Economy). People say that there is massive inefficiency in public sector coal industry. They have similar opinion about for nearly all the government sectors. Using same argument, the US has privatized nearly everything. On important point worth noting is that had the US dollar not been the global currency, the US economy would have had collapsed in 1980s (please read my article: US Dollar - A Ponzi Scheme). Since 1971, when the Nixon administration delinked the dollar from the gold price, the US has been printing its currency to fund its budget and trade deficits which other countries, including India, cannot do. Majority of money, which the US pays for its imports, is coming back to the US in form of investment in US. As explained in my article Communism Collapsed Due to Collapse in Oil Price in Late 1980’s and German Banks – Not Due to Reagan, the Soviet Union collapsed in 1991 due to the fact that it could not get few tens of billions of dollars to fund the Gorbachev’s Glasnost and Perestroika. Had oil prices increased, like they have during the Putin administration this decade, or had German banks financed Gorbachev’s perestroika like Japan financed Reagan’s deficits, the U.S.S.R. and communism would not have collapsed in 1991 at all. Therefore one should not conclude that US-type capitalism is better that the Communism which was followed by the Soviet Union. Both the systems have pros and cons.

By privatizing government services, the government is to some extent like going back to the Zamindari/kingdom system in which a zamindar/king was free to exploit the ordinary citizens.

The financial instruments, being used by the share market bankers to make outrageous amount of money, are not their birth rights. These financial instruments are there because the government is allowing them. It is high time that the government needs to intervene to make level playing field for both rich and poor because it is mainly the significant amount of corporate profit being given to the shareholders which is behind the income inequality worldwide. Please see the growth of income inequality in India from 2010 to 2016. In just six years the wealth of the Bottom 90% in India is reduced to 19.3% from 31.2% and Top 10% saw their wealth increased by the amount which Bottom 90% lost. The Top 1% saw their wealth increased from 40.3% to 58.4%.

 

Here are some facts which I would like you all to consider – please read the Section (A) and (B) at the bottom for more details:

 

(1)  Significant numbers of the financial instruments, being used by the Wall Street bankers/investors (and in share markets world-wide) to make outrageous amount of money, are made legal only in last 3 to 4 decades. For an example, stock buyback was illegal until the US Securities and Exchange Commission (SEC) in 1982 made it legal during the Reagan Presidency.

 

(2)  Till 1970s, only about 10% of corporate profits was given to the shareholders whereas now this ratio is much more than 50% to 60% which is one of the main reasons for the wealth inequality. It is written nowhere that most of the corporate profit should go to the shareholders.

 

(3)  The Wall Street (/share market) bankers are making millions and billions by just transferring money from one place to another by clicking a mouse. This system of moneymaking was not there say 100 to 150 years ago. During the early years of industrialization, the factory owners were treating the workers like slaves by forcing them to work 14 to 16 hours in a day seven days a week and 365 days a year. They were employing the kids as young as 12 and 13 years to force them to work in their factories. If we go back couple of hundred years, people had slaves who were treated worse than animals. In the US, there were companies who used to provide the owners insurance for slaves also (Slave insurance in the United States, Wikipedia). As we have improved the situation in the latter two situations (factory workers’ rights and abolition of slavery), it is now urgent to limit the earnings of shareholders and share market bankers because their outrageous earning is behind income inequality which is causing the mass unemployment in nearly all countries.

 

(4)  Brooksley E. Born, the then head of the Commodity Futures Trading Commission, was for regulating the derivative market. However, the wishes of Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin, and Securities and Exchange Commission Chairman Arthur Levitt Jr. prevailed. Ms. Born left the CFTC in June 1999. The Commodity Futures Modernization Act of 2000 made it illegal to regulate the derivative market. Derivatives are modern financial casino games. Using this financial instrument, the Wall Street bankers have made 100s of billions of dollars. After the 2008 Wall Street banking crisis, in his congressional testimony Alan Greenspan said that he was wrong in his support of deregulating the derivative market.

 

(5)  John Paulson, a New York hedge fund manager, made $3.7 billion in 2007 by betting against questionable mortgage securities during the collapse of the mortgage market. George Soros and James Simons made $2.9 billion and $2.8 billion, respectively, the same year in similar ways. Almost all of their monies were taxpayers’ money because they received this money from the AIG (American International Group), which had insured those mortgage securities (also termed as derivatives), and AIG needed to be bailed out by the government due to mounting losses. The AIG bailout was a backdoor bailout of financial institutions including Goldman Sachs, JPMorgan Chase, and Morgan Stanley. Instead of getting “haircuts,” they were paid in full. This betting method employed by these hedge fund managers was illegal until 2000, when a Republican-controlled Congress made it illegal to regulate or hinder it by passing the Commodity Futures Modernization Act.

 

(6)  As explained in my article, the US government had to spend more than two trillions of dollars to save its economy which was on the verge of collapse in 2008 due to frauds committed by the bankers (both non-Wall Street and Wall Street bankers) – please read my article US-based 'Imported' Economists Need to Stop Preaching Privatization As US Bankers Created Multiple Trillions of Dollar Frauds. None of the bankers was prosecuted and none of them lost any money. The US government spent 100s of billions of dollars (trillions of dollars in current US dollar value) when the same bankers created the Savings and Loans crisis in late 1980s and early 1990s.

 

(7)  In short the 2008 Banking Crisis, which led to the 2008 Great Recession, in US can be explained as following: Banks gave home loans to people based on fictitious papers (babysitters, usually earning $10K to $15K a year, claiming salaries worthy of college presidents (usually earning $500K a year), and school teachers with incomes rivaling millionaire stockbrokers). Bank officers as well as investment bankers made hundreds of millions of dollars in salaries and bonuses because of them. Later on, common people lost money in shares, but hedge funds made a lot of money bringing down the shares of these banks. It all boils down to the fact that the whole mechanism, or dynamics, if you like, created a domino effect leading taxpayers to pay trillions of dollars for the bankers’ misdeeds and exacerbating the economic recession of the country as well as that of the entire world.

 

(8)  The ultra-rich/Wall Street bankers, who have been earning billions and billions of dollars using the financial instruments, being made legal under newly enacted laws by the government, and also getting hundreds of billions of dollars in bailout fund (which is tax-payers’ money), cry “Socialism” when the government gives some handouts to the middle and poor class people.

 

Please read my article for details: US-based 'Imported' Economists Need to Stop Preaching Privatization As US Bankers Created Multiple Trillions of Dollar Frauds.

 

(A) Some Financial Instruments used by the Wall Street Bankers to make 100s of billions of dollars were made legal only during 1990s and 2000s:

 

Derivatives exacerbated the 2008 global economic crisis. Derivatives are financial contracts whose values are derived from the value of something else. A derivative is basically a side bet, (i.e., a bet on loans, bonds, commodities, stocks, residential mortgages, commercial real estate, loans, bonds, interest rates, exchange rates, stock market indices, consumer price index, or even on weather conditions) without owning it. It is similar to the bet a person who is not a player or does not own the team makes with someone on the outcome of a baseball game. If a person is certain that mortgage securities would fail, he would place the bet against them without owning them, making millions and even billions of dollars. For example, a credit default swap (CDS) is a credit derivative contract between two parties. CDS was invented by a JPMorgan Chase team in the mid-1990s.

Warren Buffett famously described derivatives bought speculatively as “financial weapons of mass destruction.” George Soros avoids using them “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs” (Peter S. Goodman, “Taking Hard Look at a Greenspan Legacy,” New York Times, October 8, 2008.). For instance, in October 2008, trading in Gulf Bank, one of the largest lenders in Kuwait, was halted after a major customer defaulted on a currency derivative contract, a bet on the euro that dived against the dollar in the previous ten days. It was reported that losses were as much as 200 million dinars or nearly $750 million (David Jolly, “Global Financial Troubles Reaching Into Gulf States,” New York Times, October 26, 2008).

American International Group (AIG), the world's largest private insurance company, had sold $440 billion in credit-default swaps tied to mortgage securities. When the housing bubble burst the CDSs tied to mortgage securities began to send shock waves throughout the global market. To prevent a chain reaction, the US government had to rescue AIG. When AIG and several others were running out of money after being downgraded by credit-rating agencies because of mounting losses, a $700 billion fund was established by the US Congress to bail out Wall Street firms. This triggered a clause in its credit-default swap contracts to post billions in collateral. AIG is considered “too big to fail,” so the US government had to save it. The failure of AIG would send a shockwave through the finance industry, as it had insured assets of financial firms all over the world.

Phil Angelides was a Democratic member of Congress and was chairman of the bipartisan commission to examine causes of the biggest downturn since the 1930s Great Depression. He said that Goldman Sachs’s operation was similar to selling a car with faulty brakes and then selling an insurance policy on that car. Goldman Sachs helped hedge fund manager John Paulson to select securities tied to risky subprime mortgages without telling investors that he was betting against them (i.e., betting that they would fail). Paulson made about $2.7 billion in the process. This type of betting was illegal until 2000 when the Republican-led Congress passed the Commodity Futures Modernization Act of 2000 (CFMA) to make it illegal to regulate these side bets (i.e., without owning the item). Under the 2000 CFMA act, I can bet (i.e. buy insurance from an insurance firm by paying few percentage of the house price) that your house, without owning it (and also without your knowledge), would burn down in two years and if your house is burnt in two years, I would get the insured money from the insurance firm. Due to massive Goebbelian propaganda, they try to convince people that these corrupt financial instruments, being used by fraud bankers, are good for the economy. It is an irony that when the government increases the tax on rich, then the same people would claim it to be socialism.

Also, the US government is not printing any special money for the Wall Street bankers and investors. Rather, the outrageous amount of money that these people are making comes from the pockets of common people. John Paulson, a New York hedge fund manager, made $3.7 billion in 2007 by betting against questionable mortgage securities during the collapse of the mortgage market. George Soros and James Simons made $2.9 billion and $2.8 billion, respectively, the same year in similar ways. Almost all of their monies were taxpayers’ money because they received this money from the AIG (American International Group), which had insured those mortgage securities (also termed as derivatives), and AIG needed to be bailed out by the government due to mounting losses. The AIG bailout was a backdoor bailout of financial institutions including Goldman Sachs, JPMorgan Chase, and Morgan Stanley. Instead of getting “haircuts,” they were paid in full. This betting method employed by these hedge fund managers was illegal until 2000, when a Republican-controlled Congress made it illegal to regulate or hinder it by passing the Commodity Futures Modernization Act. In 2008, Alan Greenspan, the Fed chairman when the 2000 act was passed and actually a force behind its enactment, admitted his mistake in opposing the regulation of these kinds of derivatives. Had the government not passed the Commodity Futures Modernization Act of 2000, these hedge fund managers would not have made these outrageous amounts of money.

Even if AIG would not have required taxpayers’ money to be bailed out and the company would have paid these tens of billions of dollars to hedge fund managers from its own account, AIG would have to get this money from somewhere, as government does not money especially for AIG. If you had followed the trail of the money within AIG, the trail would have ended in the pockets of ordinary people—the source of all this money. Moreover, these companies’ income has little social value, as they do not create jobs, except for a few secretaries and a few analysts.

 

(B) Several trillions of taxpayers’ dollars Spent, to rescue the Wall Street bankers and the economy, by the US Government during 2008 Great Recession:

 

Secretary, Henry Paulson blackmailed Bush Jr, then US President and the US Congress for $700 billion bailout by saying then the US might not have any economy a day after. He was the CEO of Goldman Sachs, a Wall Street financial firm, before becoming the US Treasury Secretary.

Here is the quote from an article https://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104, Secrets and Lies of the Bailout, The Rolling Stone, January 4, 2013):

 

“Much as with a declaration of war, a similarly extreme and expensive commitment of public resources, Paulson needed at least a film of congressional approval. And much like the Iraq War resolution, which was only secured after George W. Bush ludicrously warned that Saddam was planning to send drones to spray poison over New York City, the bailouts were pushed through Congress with a series of threats and promises that ranged from the merely ridiculous to the outright deceptive. At one meeting to discuss the original bailout bill – at 11 a.m. on September 18th, 2008 – Paulson actually told members of Congress that $5.5 trillion in wealth would disappear by 2 p.m. that day unless the government took immediate action, and that the world economy would collapse "within 24 hours."

 

To be fair, Paulson started out by trying to tell the truth in his own ham-headed, narcissistic way. His first TARP proposal was a three-page absurdity pulled straight from a Beavis and Butt-Head episode – it was basically Paulson saying, "Can you, like, give me some money?" Sen. Sherrod Brown, a Democrat from Ohio, remembers a call with Paulson and Federal Reserve chairman Ben Bernanke. "We need $700 billion," they told Brown, "and we need it in three days." What's more, the plan stipulated, Paulson could spend the money however he pleased, without review "by any court of law or any administrative agency."

 

The White House and leaders of both parties actually agreed to this preposterous document, but it died in the House when 95 Democrats lined up against it. For an all-too-rare moment during the Bush administration, something resembling sanity prevailed in Washington.

 

So Paulson came up with a more convincing lie. On paper, the Emergency Economic Stabilization Act of 2008 was simple: Treasury would buy $700 billion of troubled mortgages from the banks and then modify them to help struggling homeowners. Section 109 of the act, in fact, specifically empowered the Treasury secretary to "facilitate loan modifications to prevent avoidable foreclosures." With that promise on the table, wary Democrats finally approved the bailout on October 3rd, 2008. "That provision," says Barofsky, "is what got the bill passed."

 

But within days of passage, the Fed and the Treasury unilaterally decided to abandon the planned purchase of toxic assets in favor of direct injections of billions in cash into companies like Goldman and Citigroup. Overnight, Section 109 was unceremoniously ditched, and what was pitched as a bailout of both banks and homeowners instantly became a bank-only operation – marking the first in a long series of moves in which bailout officials either casually ignored or openly defied their own promises with regard to TARP.

 

Congress was furious. "We've been lied to," fumed Rep. David Scott, a Democrat from Georgia. Rep. Elijah Cummings, a Democrat from Maryland, raged at transparently douchey TARP administrator (and Goldman banker) Neel Kashkari, calling him a "chump" for the banks. And the anger was bipartisan: Republican senators David Vitter of Louisiana and James Inhofe of Oklahoma were so mad about the unilateral changes and lack of oversight that they sponsored a bill in January 2009 to cancel the remaining $350 billion of TARP.

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