Prelude to an American Spring: Regulating the Banks

        It’s been forty years since the 1973 oil price shocks transformed the formula of labor costs that have become today’s era of low union membership and growing inequality.  The price shocks back then were caused by Arab reaction to the U. S. re-supply of Israel in its 1973 war with Egypt.  There have been virtually unending consequences. OPEC, in response, raised the posted price of crude by 70% and placed an embargo on exports to the U.S. and other nations allied with Israel.  Although prices soon stabilized, the oil crisis had a profound impact on the international system.

It’s a suitable labor Day history lesson new generations should know about. At the beginning of the boycott with the price of oil quadrupled, gas rationing occurred in the U. S. and Europe, the Great Lakes greenhouse industry collapsed almost overnight, a deep recession set in that included a 45 percent decline in stock prices.  

The center of this drama is how the OPEC boycott created new incentives for investment capital to search for global investments whose lower labor costs would balance the rise in energy costs. The Central banks in the U. S. abandoned their long time customers—U. S. manufacturers—and moved toward overseas investment. The effect was to make money not things, to financialize their capital, shifting not just to overseas investment but to a seemingly infinite variety of financial instruments such as today’s synthetic securities: Credit Default Swaps, Derivative Securities and the rest.

Back then, 1973 to 1983--within ten years time—most of the vast steel and machine tool industries in the U. S. closed down. Cities like Detroit, Cleveland, LA and Baltimore went into death spirals.   

That’s why Labor Day 2013 is almost universalized. As previously noted here, the Pew Research Center last April reported that in dollar terms in the past six years the mean wealth of the richest 8 million households rose $697,651 while the mean wealth of 111 million less affluent households fell $133,817 .

That’s why on this Labor Day 2013 the banks are the biggest winners in the aftermath of the 2008 Great Recession.  In his new book, Debtors Prison, Robert Kuttner describes the rise of a federal reserve banking system created by investment banks like J. P. Morgan and Goldman Saks for the J. P. Morgans and Goldman Saks. When, during the Depression years the Glass-Steagall Act separated the speculative part of the economy from the real part (e.g. making steel), its repeal in 1999 had catastrophic consequences, opening the flood gates of the big banks’ speculative investment and leading to the crash of 2008 and the loss of the homes of millions upon millions of Americans.

    

           Kuttner believes the supposed antidote—passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act—is destined to fail because the same banks that ruined the country are still in the driver’s seat, richer than ever, working with all their huge financial lobbying power to water down the rules to be implemented by Dodd-Frank, which has turned out—due to pressures from the banking lobby—to not have enough teeth to succeed. 

          Changing that will require a non-violent American Spring that will need several years to be successful.  Measures of moral reform and determination must be mobilized that only a large scale democratic movement can create. Faith groups and democracy groups, Labor unions and progressive research centers at our universities need to join together to make that happen.