Gary Karz, CFA
Host of InvestorHome
One of the major developments that followed in the wake of the Global Financial Crisis (GFC) was Occupy Wall Street (OWS). OWS began on September 17, 2011 in Zuccotti Park, New York and the movement grew quickly with Occupy protests taking place in over 95 cities across 82 countries, and over 600 communities in the United States by October 9 2011 (OWS and the Occupy Movement at Wikipedia). Despite the international attention, the movement seemingly lost momentum after protesters were forced out of Zuccotti Park on November 15, 2011.
The Occupy Handbook edited by Janet Byrne was released on 4/17/2012 after the movement's publicity had for the most part died down. My initial interest in the book was the participation of Michael Lewis (his book The Big Short is the best seller about the crisis with over 1 million copies sold). As part of the book's promotion, Lewis' interview from the book was posted online, and I immediately focused on his comments both about what caused the crisis, and his suggestion of a boycott of the "Too Big To Fail" firms.
I ordered The Occupy Handbook when it was published, but the momentum from the book release seemed to fade and I didn't make the time to read it until recently. Now that I've had a chance to work my way through the 500 pages (made up of commentary from more than 60 contributors), I'm glad I finally read the book for several reasons. First and foremost, the book offers a great education in OWS, as well as the historical precedents that the contributors cite. But the book is also rich in material regarding opinions about the causes and prescriptions for the global financial crisis. As an aggregator of opinions on both sides, I was pleasantly surprised to find both contributions that were complimentary of the movement, as well as those that were highly critical. For that reason, I think people with predispositions on both sides of OWS will find material to like and dislike in the book, but nearly all are likely to learn something regardless.
The book is of particular interest for my research given that none of the book contributors participated in my crisis experts survey, although six of them are discussed in my article about individuals that warned in advance of the crisis (Paul Krugman, Raghuram Rajan, Robert Shiller, Nouriel Roubini, Michael Hudson, and James Grant). I'll be adding commentary from the Handbook contributors below the direct responses I've gathered in the Global Financial Crisis Expert Survey.
Some of the contributors focused on the big picture and significance of the movement (from their view). For instance, Amy Goodman and Denis Moynihan write "At the heart of the Occupy Wall Street movement is the critique that wealth and opportunity are not equitably distributed, and our media system, largely controlled by corporations, contributes to that status quo." George Gresham writesOccupy Wall Street has reshaped the national debate as quickly and dramatically as any social movement in American History. Before fall 2011, America had no common language to explain the crash of 2008 and its causes. Now we can see and describe the chasm separating the 99 percent and the 1 percent. The Occupy movement might be mocked as naive for lacking a specific set of demands, but it has brilliantly identified the one fundamental problem of our time. Because Occupy Wall Street has drawn attention by marching across bridges and sitting down in streets, some critics call it a lawless mob. But Occupy's peaceful protests are firmly in the tradition of the civil rights movement.
Emmanuel Saez is one of the economists whose research gave Occupy Wall Street the slogan "We are the 99 percent." Pew's recent data (4/23/2013) on inequality is here. Saez writesThe 2008 economic crisis was largely the consequence of deregulated finance running amok. Even before the crisis, economic gains for the bottom 99 percent had not been great. Although it was necessary to bail out Wall Street to prevent greater economic damage, the public got the impression that the government stepped in to help Wall Street without asking any significant sacrifice from Wall Street in return... New technologies and globalization cannot explain the dramatic increase in the U.S. income gaps because countries in continental Europe--such as France or Germany--and Japan are going through the same technological and globalization forces yet are not experiencing such a dramatic increase in income gaps. This implies that institutions, government policies and regulations, and social norms play a central role in shaping income gaps. To put things simply, the U.S. income gaps shrank significantly after the Great Depression with the New Deal policies of stringent regulations and progressive taxation and widening significantly after the Reagan revolution that undid those regulations and progressive taxation.
Jeffrey Sachs takes an expanded view with additional "demands" for Occupy movement. He writes"The Occupy movement has been repeatedly accused of being a protest without a cause. This is flagrantly false. It's cause is the reform of the political economy of global capitalism. It looks equally to progressive political change and progressive economic change. While there is no single platform to arise from the global movement, the main demands are clear enough (see the book for his list of 8)
Other contributors were more balanced and willing to question some of the core Occupy positions. Gillian Tett (author of Fool's Gold) writes "The question that citizens and politicians alike need to ask is not why did the bankers "hide" their activities before 2007, but why did so few people actually ask hard questions at all. Why, in other words, did Western society allow finance to spin out of control-in plain sight? And what does it mean for how we treat finance today, on Wall Street or anywhere else?
Nouriel Roubini (co-author of Crisis Economics and the most widely credited crisis predictor) writes"The concept of a squeezed and sinking 99 percent and a thriving top 1 percent (as the Occupy Wall Street protestors have it) may be a simplification of a highly complex situation. But it resonates with a deeper truth that unfettered free markets, deregulation, and globalization have not benefited everyone and that some of their pernicious consequences are associated with massive job losses, mediocre income growth and rising inequality." He continues "The rise of inequality and related weak growth of working-class and middle-class incomes have many causes... First, the increase in private and public leverage and the related asset and credit bubbles are partially consequences of inequality... In Anglo-Saxon countries the response was a democratization of credit. Financial liberalization allowed struggling households to borrow to make up for the difference between spending and income, leading to a rise in private debt. In the social welfare state economies of continental Europe, the gap was filled by the provision of public services (free education, health care, and so forth) although not fully paid for with taxes, thus leading to the rise of public deficits and debt. In both cases, such growing private and public debts eventually became unsustainable, leading to financial crisis. Second, corporate firms in advanced economies are cutting jobs because they say there is uncertainty, excess capacity, and not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand. Thus, what is individually rational is destructive in the macro-aggregate. We end up with a catch-22... Karl Marx was partly right in arguing that globalization, unfettered financial capitalism, and the redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (even if many of his views were wrong and his view of socialism would be a better system has proven totally mistaken)."
Some of the contributors focused on the financial industry and the speculative aspect of the industry, as well as wider society. For instance, John Cassidy (author of How Markets Fail: The Logic of Economic Calamities) offers a well documented/referenced commentary on the growth of the financial industry and citing Andrew Haldane adds "In most industries, when people are paid too much their firms go bankrupt, and they are no longer paid too much. The exception is when people are paid too much and their firms don't go broke. That is the finance industry." Along similar lines Arjun Appadurai writes "Consider television: if you spend even three hours surfing between CNN and BBC on any given day (surfing for news about Libya or about soccer for example), you will find yourself regularly assaulted by business news."
One of the criticisms of more recent Occupy focused books is that "the movement never stated what it was for." Martin Sandbu in his 3 Occupy book review (of The Democracy Project by David Graeber and Allen Lane , Meme Wars: The Creative Destruction of Neoclassical Economics by Kalle Lasn, and Occupy: Three Inquiries in Disobedience by WJT Mitchell, Bernard Harcourt and Michael Taussig), writes that it is "sad, too, that none of the books mentions Stéphane Hessel, the French second world war resistance hero who died this year." In the Occupy Handbook, Robert Zaretsky does write about Stephane Hessel's pamphlet Indignez-vous! which sold more than 2 million copies in France and more than a million copies in three dozen languages. Time for Outrage, the American edition, was released in August 2011 and argues that life and liberty must still be fought for, and urges us to reclaim those essential rights we have permitted our governments to erode since the end of World War II. Citing a 2011 interview, he adds "While the enemy today is far less obvious than it was in occupied France, 'we know who it is: financial speculation. Come tomorrow, political engagement will be the same as in 1944: to regulate the markets and introduce a true social democracy.'"
In his interview with Tom Verlaine, Matt Taibbi (author of Griftopia) discusses the equity markets and statesIt's worse than a casino. In a casino you actually have to post money before you make a bet. In the derivatives markets anyway, banks and hedge funds can build huge positions without putting a dime down. These mountains of unregulated swaps create the potential for huge sucking whirlpools of losses. In a real casino, all the losses average out-it's a zero-sum game. Not so in the modern wall street.
Returning to the topic of the primary causes of the GFC, Martin Wolf, author of Fixing Global Finance suggests that we need to emphasize the role of the government and its agencies, including central banks. He writes"These acted as stabilizing forces during the crisis. Indeed, they needed to do even more than they did. But they also acted as destabilizing forces before the crisis: in particular, central banks were too aggressive in preventing moderate recessions, thereby exacerbating the willingness to take risks, and governments were too willing to encourage excessive leverage in the household sector, to promote the dream of universal homeownership."
Raghuram Rajan (author of Fault Lines) writes"America needs to accept that it has more than a cyclical problem: significant parts of the workforce have not adapted to changes in technology or global competition. The United States has to tackle the problem at its source by helping more Americans obtain the ability to compete in the global marketplace. This is much harder than doling out credit or keeping interest rates really low, but it will pay off in the long-run."
Bethany McLean (co-author of All the Devils Are Here) notes that prior to the crisis was the first time in history that mortgage origination growth and income growth were negatively correlated. Mclean writes that the crisis doesn't prove one way or another "this is what happens when the government says everyone should have a home" and if subprime and Alt-A loans had been limited to first-time homebuyers, there never would have been a crisis.
Carman Reinhart and Kenneth Rogoff (authors of This Time is Different, but more recently in the news for having one of their well known papers publicly critiqued) offer commentary that separates root causes of the crisis, its symptoms, and features such as financial regulation, which served as amplifiers of the boom-bust cycle. Their handbook chapter (PDF here) appears to be for the most part a condensed version of this paper by Reinhart (A Series of Unfortunate Events: Common Sequencing Patterns in Financial Crisis).
Discussions about events outside the US were an additional bonus of the Handbook. For instance, Robert Buckly points out that at the end of WWII, Lithuania had a per capita income level similar to Finland's. By 1991 its income had fallen to one-seventh the Finnish level. Neri Zilber writes that it takes an average of 7.7 years of salary to purchase a home in Israel -- compared to 2.9 in the United States, 5 in England, and 6.8 in Australia. The unique nature of the Israeli protests, however, resides in the fact that they took place in a prosperous economic environment. The government and the people had ostensibly done everything right--no subprime mortgage crisis as in America, no tax dereliction as in Greece, no hefty budget deficits as in Italy.
Some of the other Handbook contributors commented on the challenges and problems that OWS faced. For instance, James Miller writesthe challenge is one of coping with participants who hold radical, often incommensurable differences of opinion, including different views on whether or not social justice requires less income inequality, never mind the abolition of capitalism. OWS also had to deal with many other things people do not share: notably moral beliefs and religious convictions, but also passion for political participation.
David Cay Johnston addressed one criticism this way"Critics note that the top 1 percent make a fourth to a fifth of all reported income but pay close to 40 percent of all federal income taxes. True, but the incomes of those at the top have been growing much faster than their taxes, meaning their burden is easing. Further, the measure is not the number of dollars paid but the share of income paid.
One of the strongest challenges to multiple OWS positions seemed to be brought out by Tyler Cowen and Veronique de Rugy. They write"Each of these complaints has some validity, but there are other and perhaps more fruitful ways to frame the debate. Let's examine the representative claims made by the Occupiers to see how they may be misconstruing the problems and why some of their proposed solutions may make things worse rather than better.They continue
- Claim 1: Wall Street is the main force holding back poor Americans. Wall Street has contributed to some very real problems, but the core issues for poor Americans are often healthcare, education, and cost of renting an apartment or buying a house... The U.S. health care system is hardly market-based. Instead it gives us the worst features of both private and public systems, but the public-sector component plays a very large role. For instance, nearly half of all health care spending comes from tax dollars.
- Claim 2: The top 1 percent is where the true class warfare is... There is systematic transfer of wealth from the relatively young and poor to the relatively old and wealthy. To put it slightly differently: the Occupiers should not be occupying Wall Street, they should be occupying AARP. Roughly 40 percent of the federal budget goes to Americans over the age of sixty-five, mainly through Medicare and Social Security (this number includes the 28 percent of Medicaid spending that goes to older people.) Assuming no significant changes in benefit levels, by 2030 these payments will consume 54 percent of the budget, and they will likely squeeze out just about everything else.
- Claim 3: The top 1 percent are basically fraudsters and financial tricksters... the top 1 percent [with financial-sector workers] also comprises realtors, lawyers, doctors and other medical personnel, and executives and managers. In fact, excluding capital gains, in 2005 13.9 percent of taxpayers in the top 1 percent worked in finance.
- Claim 4: More broadly shared prosperity can be achieved through redistribution of income. General economic growth lifts everyone's income, even if the incomes of those at the top increase a lot more. However, taxes on the 1 percent can't be increased excessively without consequences for the average American... even if higher taxes don't discourage the efforts of those who are wealthy, they decrease the incentive for individuals to become wealthy in the future. The point is not that current rates are necessarily the correct ones, only that we should not overestimate the gains from trying to tax the rich more heavily. It's a core economic lesson that trade-offs are everywhere."If shared prosperity is the goal, there is strong evidence that the differences in lifestyle and well-being between the very rich and the rest of us have narrowed dramatically in the last few decades. The vast majority of Americans have broad access to new pharmaceuticals, air travel, nutritious and cheap food, the Internet, and virtually all the technical innovations that the superrich have access to. On the whole, if one compares the quality of life of the very rich and the rest of us, one finds that it has become more alike than people routinely assume. Furthermore, less-well-educated groups have gained more leisure time than better-educated groups over the past forty-five years. Such trends extent beyond material goods. Inequality in personal happiness, as measured by surveys and other questionnaires, is not growing in the United States. The relative measures of happiness and satisfaction in the United States are comparable with those in Sweden and Denmark, two countries that most progressives and, one assumes, many OWS protestors look at with envy.
Another positive of the book (and useful for my GFC research) was the prescriptions offered. For instance, Lawrence Weschler cites Martin Feldsteina's October 12, 2011 NYTimes Op-Ed where he suggests "To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value." Brandon Adams suggests a Voluntary Financial Transactions Tax, while Daniel Gross discusses the "procyclical" nature of the economy and suggests that the obvious countercyclical tool at our disposal is a financial transactions tax. Jeff Madrick recommends 1) "Medicare for all" and 2) public financing of all national elections. Felix Salmon encourages banks/servicers to mark their mortgages to market and cites the American Homeowner Preservation (AHP) (see wikipedia) which set up a hedge fund devoted to buying pools of defaulted mortgages and keeping homeowners in their homes (while making money in the process). It started with non-profit model and brokered willing buyers with underwater homeowners, which then did short sales and lease back to the former owner with an option to repurchase.
Michael Hudson writes"To restore normalcy, debts need to be written down. Debt cancellation can be done by applying what's been New York State law since before the Revolution, going back to when New York was still a colony. I'm talking about the law of fraudulent conveyance. This law says that if a creditor lends to a borrower without having any idea how the debtor can pay in the normal course of business, without losing the property, the loan is deemed to be fraudulent and declared null and void... As part of the rules to define what constitutes "fraudulent" or irresponsible lending, mortgage debt service should be reduced to the rate that former FDIC Chair Sheila Bair recommended: 32 percent."
As noted above, many have criticized OWS for not having an identified primary goal or set of goals. Two of the best selling writers (Lewis and Taibbi) that have written about the crisis do offer a relatively straight forward goal focused on the "too big to fail" banks. Michael Lewis writes "if I were in charge I would probably reorganize the movement around a single, achievable goal: a financial boycott of the six 'too big to fail' Wall Street firms: Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Wells Fargo." Similarly, Matt Taibbi suggests OWS followers "Organize mass depositors' strikes and other actions with the concrete aim of breaking up the 'too big to fail' banks, which are a threat to national security. They are vulnerable, and this is the quickest way to show America that OWS means business and must be dealt with. I think OWS needs to function like a giant short-selling fund, only without the profit motive-it has to have the power to identify corrupt companies and put them out of business, whether through consumer strikes or other political actions. I think it's possible to develop this capacity."
Wikipedia notes that national polling in November of 2011 found that 33% of voters supported OWS and 45% opposed it, with 22% not sure. A January 2012 Rasmussen survey found 51% of likely voters found protesters to be a public nuisance, while 39% saw it as a valid protest movement representing the people. Certainly the majority of the book contributors were supporters of OWS, but both supporters and critics discuss problems and issues that arguably contributed to OWS fading from the spotlight.
Over five years into the Global Financial Crisis people still argue about its causes and appropriate responses. Martin Wolf offered this relatively balanced perspective.No bigger challenge exists than the relationship of the market to democratic politics. To some of the free market side, the answer seems to be that the former has all the legitimacy and so should have the ability to purchase the latter. To some on the anti-market left, the answer is that the market should be absorbed by politics completely. The latter approach is now almost entirely abandoned. The former remains intellectually vigorous, particularly in the United States. The correct view is in between. Politics and the market interact. But both have their own legitimate spheres of operation. The market is based on the individual's role as producer and consumer. Politics is based on the individual's role as citizen. To function well, each needs to be protected from the other.
In addition to the criticism found in the Handbook, I have seen some other prominent writers offer additional commentary on OWS. For instance, in Occupy Wall Street at One Year: What Impact Has the Movement Had?, Eric Tyson suggests that "It seems that at least part of the unhappiness of the OWS movement is jealousy - and ignorance. In numerous interviews I've seen of the protestors, they say things like they want to 'demolish' and 'destroy' our economic system and identify themselves as socialists and even communists. But these folks miss a very important point. Lower income earners in America are so much better off than the vast majority of people in the rest of the world and are so much better off than previous generations were in America."
Andrew Ross Sorkin has also come down hard on OWS and predicted in Occupy Wall Street: A Frenzy That Fizzled "It will be an asterisk in the history books, if it gets a mention at all." While many have compared OWS to the Tea Party, Luigi Zingales (author of A Capitalism for the People) suggests The Occupy movement and the 'tea party' have some common targets.
Another relatively balanced criticism of the OWS movement comes from Sistene Secrets author Benjamin Blech, who cites Philosopher Philo for the quote "Money is the cause of good things to a good man, of evil things to a bad man." In Rich people are not the enemy, Blech summarizes"When the Occupy Wall Street crowd talks about cleaning up corruption, when it points a finger at all those whose financial recklessness plunged the country into the Great Recession, when it gives voice to the anger we all feel at the perpetrators of highly immoral business practices that hurt millions of innocent victims – for all of these righteous causes they deserve our unqualified thanks. It's only when they confuse anyone who is wealthy with the enemy that I think we need to remind them that just as much as the poor don't deserve to be despised for their poverty, the rich don't deserve to be hated simply because they have money."
Cartoonist Scott Adams summarizes in That Top 1% Thing, "The genius of our constitution is that it has a big red button labeled "evolve." We just need to push it." Unfortunately, as Brandon Adams points out in the Occupy Handbook "What's the appropriate strategy when you're going through a financial crisis in the midst of a broader, long-run decline? We haven't figured that out yet?"
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