Economic Update: Nomi Prins on the Distorted US Financial System

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In this week's show, Prof. Wolff talks about a new Congress report on huge US wealth inequality; Angela Merkel on relying on Russian oil and gas, the irrationality of 20,000 immigrants dumped on NYC, and Harvard exploiting its tax-exempt status. In the second half of the show, Wolff interviews Dr. Nomi Prins, former Goldman Sachs director, on the distorted US financial system and its social effects.


Transcript has been edited for clarity

Welcome friends to another edition of Economic Update, a weekly program devoted to the economic dimensions of our lives. I'm your host Richard Wolff. In today's program we'll be talking about a new report from the U.S Congress on the distribution of wealth here in the United States. We'll also take a look at Germany's former leader Angela Merkel and what she has to say about relying on Russian oil and gas. We'll take a look at the immigrants being shipped to New York from Texas and Florida and the absurdity of what that's all about. And finally we'll participate in the enjoyment of Harvard University once again exploiting its tax-exempt status and mocking the rest of us. In the second half of the show we will interview Nomi Prins, a well-known specialist on the financial sector of the economy, journalist and author.

So let's jump right in. The report by the Congressional Budget Office dated September of this year is called Trends in the Distribution of Family Wealth 1989 to 2019. I mention the title only for those of you that might want to follow and take a look at this remarkable document about what happened to the wealth in this country, the United States, over the last 30 years up until 2019. But I'm going to begin at the end of the story and you'll see why as we go through it. In 2019 here's how the wealth of this country stacked up in terms of who owns what. At the top the top one percent, the richest amongst us, together owned 33% of all the wealth in our society. I'm going to do that again: one percent own 33% of all the wealth. That's stocks, bonds, cash, land, you name it. Put all together the top one percent control 33 percent. The top 10 percent of our people, citizens of the U.S, own 72 percent. Let me do that again, the top 10 percent have three quarters of the wealth. And now let me jump down to the bottom half of the United States. The least wealthy 50 percent of us, you know what we own together? The 50% of us at the bottom - get ready - have two percent of the wealth. The bottom half have two percent and the top one percent has 33 percent. That is stunning inequality. You may never have thought that the bottom half live on two percent and the upper one percent live on 33%, but try. Try to think about it, it'll give you a much more realistic picture of the United States economy than you'll get on the evening mass media news.

And here's the next factor in this report that blew my mind, when I thought about it. Back in 1989, that's 30 years ago roughly, the bottom 50 percent owned, you guessed it, two percent of the wealth. In other words over the last 30 years the bottom half of Americans shared together two percent of the wealth of our society. And that's exactly what they have now. Nothing for them changed, nothing.

So how did the rich come to be so much richer? There's only one answer to this, that the arithmetic makes clear, the middle lost out big time. The middle lost out to the top. The enemy, politically, is not the bottom. For the middle you've got to understand who it is that ripped you off over the last 30 years. And it's the people who own today what 30 years ago people like you owned. And if you think that's an accident you don't understand the system.

Next let's turn to Angela Merkel, one of the most popular and long lasting of German leaders in the post-war period, only recently stepping down from being the Chancellor in Germany. She gave a speech the other day. And, boy, was there a lot to chew on in what she had to say. First, and this is an interpretation, I'm not quoting her. First, she pointed out, with a certain irony, that for the many years that Germany relied on gas and oil from the Soviet Union there was no problem. The Germans used it, the Russians sent it. The Russians did well by selling the oil to Germany the gas that helped them recover from the collapse of the Soviet Union after 1989. And by the same token it was wonderful for Germany. Why? Because Germany got cheap energy. And while that's not the only reason it is one important reason why Germany became the powerhouse economy driving Europe. In other words it was a convenience and a benefit to both sides. Indeed, Angela pointed out that all of Europe benefited in many ways from the wealth that Germany could accumulate because it got cheap oil and gas. She makes it clear that in her mind - my interpretation - the sanctions program imposed by the United States, Germany and other countries on Russia after Russia invaded Ukraine is a self-destructive mistake. The bizarre conclusion you would have to draw: that capitalism in Western Europe was much more comfortable with a Soviet government in Russia than it is now with a non-socialist, non-communist, indeed anti-communist, government of Mr Putin in Russia. She implies that the damage done by this sanctions program is to the entire European economy built up on 30 to 40 years of cheap energy from Russia. And that it will long be regretted having done this.

My third update has to do with the 20,000 or so immigrants that came to New York City. As I go through this I want you to understand with me please that this is a display of the irrationality of American capitalism on a scale that even those who continue to defend this declining system will have to wonder about. Okay, Florida and Texas are very large states by population and by wealth. Sending twenty thousand immigrants out of your state when you have many, many millions of people and a pretty robust economy has nothing to do with suffering or anything else. It is a strange act of political theater. Okay, sleazy politicians are desperate. They dare not tax the rich who run them and they dare no longer add taxes to the mass of people. So they have to constantly appear to be doing magic; providing services without taxing anybody to pay for them. Usually they play that game just by borrowing the money. And you know, of course, from whom: from the rich, whom they don't tax. Instead they borrow from them and have to pay them all back. Besides that absurdity they do periodic theater, like exporting immigrants.

Then we come to the other end of the line, New York City Mayor Adams here, running around like a chicken without a head, screaming up and down "this is awful!" Of course it's awful, you've got to do something about this. And you're the same political party as the President; would have been a suggestion to work something out here, since it's obviously an interstate problem and not the problem of a particular state. I'm still waiting for Mr Adams to do anything other than run around and declare emergencies. Now, on the other hand Mr Adams does have a problem. There are laws in New York State - we don't have them in many other states, but New York State is, how shall I say, different. Here's the law: you've got to provide a shelter for everyone. That's the law. You cannot have people on the street unless they choose to be there. You've got to give them the option of a shelter, number one. Number two: if anyone is in an apartment and is evicted or proceeded against by a lawyer you must provide them, if they can't afford it, with legal counsel - a lawyer - so they don't get ripped off in the legal details of the process.

Wow! We already have 80 to 100,000 homeless, that's the official numbers. We're adding to them by bringing immigrants here. But, of course, they have to be given shelter and they have to be given a lawyer to manage all of these things. Wow! And where's the money going to come from? And what is the city supposed to do? Then we have the courts that are overburdened here in New York. See, it turns out we're not giving them enough money either. There just somehow isn't enough money to go around. Except for that one percent at the top. Remember? The ones with 33% of all the wealth? We all know where the wealth is, but we don't put it where the needs are. And that's the peculiarity of American capitalism.

Well, it turns out that if people aren't paying their rents and if people - landlords - aren't getting their money and therefore the landlords can't pay off the banks for the loans they took out... The whole system is trembling with this additional problem of the immigrants kind of blowing the system up. And you know something? If you don't help immigrants - homeless, without homes, - and if you don't help people becoming homeless through evictions that are semi-legal at best then you have to provide them with the lawyers, as I pointed out to you. But there's not enough money, so they've been pushed through the legal system without giving them the lawyers to which they are legally entitled. And you know what that means? That means within months there will be lawsuits - class action lawsuits - against the New York state government and the city government for not abiding by the law and therefore damaging thousands and thousands of people. And a huge multi-million dollar settlement will be imposed on the city, further restricting it's ability to provide services. The chaos and the irrationality of this really boggles the mind.

So let me conclude my updates by talking to you about how the other - I was about to say half, but it isn't half... how the one percent lives. Harvard University proudly announced - with no joke here - its latest 5.6 billion dollar budget yielded them a 406 million dollar surplus, that's the word they used. You know, if you're a private enterprise you'd call it a profit. But not them, no, no. We don't make profit, they want us to believe. Wow! And all of that money, the billions that they run their university with and the 406 million profit they earned, they pay no income tax to the Federal Government and no income tax to Massachusetts. They're tax exempt and they're laughing at the rest of us who aren't.

We've come to the end of the first part of today's show. And before we get to the second half I want to remind everyone that Economic Update is produced by Democracy at Work, a small media organization celebrating it's 10th anniversary producing system analyses through a variety of media including live virtual events like my upcoming conversation with David Harvey on November the 18th. Go to our website democracyatwork.info to learn more about it. And while you're there, be sure to follow us on Facebook, Instagram and especially our YouTube channel, as we are steadily getting closer to our goal of having three hundred thousand subscribers before the end of this year. Please stay with us, we'll be right back with Nomi Prins, our special guest.

RW: Welcome back friends to the second half of today's Economic Update. I am proud, pleased and genuinely enthralled to have with me today a friend and someone who's been on this program before, Nomi Prins. Nomi is a former Wall Street executive. She was a managing director at Goldman Sachs in New York and at Bear Stearns in London. She was also an executive at Lehman Brothers and Chase Manhattan Bank. She left Wall Street to be an investigative journalist, author, speaker and financial advisor. She has written six books including her latest Permanent Distortion. That title refers to the gap between financial markets on the one hand and the real economy on the other. So, first of all. Welcome to the show Nomi.

NP: Thank you so much. I'm so excited to be here and to talk to your audiences, thank you so much.

RW: Good, that's what we want. And so let me throw the first one. I think it's important, because so much of what so-called high finance is opaque to people, not clear, murky or invisible that I give you a chance right at the beginning, tell us what the basic point of your book is, the basic thesis that you want people to understand.

NP: Yeah, thank you. Again, I came from inside Wall Street, I know the language and I know how obscure Wall Street, the Federal Reserve and sort of the powers-that-be attempt to make it, specifically to retain power and control over how they deem money should flow into the markets versus the real economy. And the crux of the book digs into that very gap. I think we all know in our own lives that things aren't quite right. And for various reasons they haven't been for a long time. But why I call the distortion between how money is manufactured and how it flows and how easily it can flow into the financial markets relative to how slow-going, how political, how difficult, how whiny politicians are around the edges as well for that very money to get into the real economy to have lasting effects... That gap is permanent. And what happened in the wake of first the financial crisis and then the pandemic is that with what the Fed did to manufacture up to nine trillion dollars worth of money that flowed through Wall Street into the financial markets, and other central banks around the world did this as well, that permanently distorted how markets function. Because they had all of that extra help - 41 trillion dollars globally. And how the real economy gets maybe crumbs at the edges. And that's why we effectively stagnate economically, foundationally and in our lives relative to what we see happening in the markets.

RW: You know, it leads me to throw a question at you I hadn't thought of before. I remember reading over and over again, I won't mention names, but well-known people telling us we didn't have to ever worry about inflation anymore because, look, here's all this money being pumped into the economy, basically throughout this century, all the way back to the Dotcom crisis in 2000. Because, see, there's no inflation on Main Street. And I remember thinking to myself 'well, all that money had to go somewhere. Where did it go?' And the answer is it inflated the stock market. Of course we had an inflation but it was there. So that all the people whose wealth depends on the stock market, for them these were not problematic times, they were a good time. Am I reading it right?

NP: Now that's absolutely right. And I have information and, actually, I don't usually put graphs in my books but I did in this particular book. Because in the very beginning chapter there is a graph that shows very specifically how much money flowed into the stock markets. And how, yes, those were inflated and no one cared, no one talked about it, no one said "well, gee, they're inflated because the Fed's creating this money, it's going to Wall Street, it's being leveraged, it's going into hedge funds and private equity funds and all these financial players for whom it's very easy to access that money cheaply, it's very easy, they don't have, like, complicated forms to fill out, it sort of just flows into their coffers." I'm simplifying that a little bit. But, really, relative to real people that is the case. And the real economy on average since the beginning of the 2000s effectively at most average under two percent growth per year. Whereas the stock markets on any given year average somewhere between 15 and 20 percent. There are ups and downs during this period, but on average those are the two figures that we're looking at. So we're looking at a very big multiple of how, yes, that money went into markets versus the real economy.

But it's even more than that, Rick. What happens when money is created out of nowhere? It's not worked for. It's not even profits or revenues from small or big or medium-sized businesses. What it is is created. And as a result, because of how our financial world exists today and how it's existed between banks and the Federal Reserve (the Central Bank, the sort-of lender to the banks from 1913, when the Federal Reserve Act of 1913 was passed) is that the money they can access is cheap and it's easy and it's abundant. So what happens is if banks have debt they want to get rid of or they just want to sort of give it to the Fed in return for cash they can do that very simply, because that's the system that we exist in. Real people can't do that. And in terms of time, and this I bring up many times in the book, because this is a global occurrence, it takes a long time for money to get into the real economy, in the best of times, to create infrastructure, to have technology that impacts people, not just in city centers but all the way out through urban and suburban outskirts, all of that money takes time to get to places. It takes commitment, it takes workers, it takes strategy, it takes planning. And money that goes into the stock market, it takes none of those things, it takes a nanosecond of a flip of a keyboard, of an electronic switch of a computer trading system to just get to where it wants to go. And to multiply in that fashion. So it's also the timing of how this money is accessed and where it goes and how easily it can basically refabricate itself once it's there. And that's not into the real economy.

RW: Do you worry - just you as an analyst who sees this - do you ever worry that the great distortion, the permanent distortion, if indeed it turns out to be permanent, is creating a gap that is no longer just economically between finance and the real world but is between a one to five percent of the people who are living the life of Riley because they're in those circles versus a mass of people who feel more and more discarded, excluded? And that this is not a sustainable political arrangement?

NP: Yeah, that's a really good question. I do delve into geopolitics quite a lot in this particular book. And the result of that, of that money flowing and being created to flow to the top and creating that permanent gap, which also creates that permanent distortion between the real economy and the markets also creates, yes, that feeling of lack of control, that feeling that political leaders are not in touch. And that's something that has happened over the number of years that the Fed's created so much money and other central banks have as well. We saw in 2019, and I talk about this in the book, it was the year of the most civil and social unrest throughout the planet. So not just in the third world, not just in the developing countries but throughout all of the nations on Earth in 2019. And this was before the distortion became permanent. This was when the distortion was just simply big, between where money was going into the markets and where it was going into the real economy.

And we have more of that coming up now. Of course the pandemic sort of put a little bit of a lid on what was happening in terms of that intense feeling of disconnect, not just for money and markets but also from political leadership throughout the world. But now that's coming back. And so what I talk about is how what we saw in 2019 is really just a precursor to more of a chaotic sort of pace of changing politics, of adversarial politics and of politics not keeping up with people's real needs. Talk about inflation today. Now that we have real inflation, inflation that hurts people's pocketbooks every single day, and much of that has to do with a combination of geopolitics, supply chains, we're looking at oil prices a little bit down right now but basically out of control, natural gas prices at highs, food at highs, food shortages, poverty, fuel poverty, famine... We're looking at a confluence of events that has created a situation where the people in control of the money and the companies in control of the money can even boost prices by higher than they might otherwise be because of those supply issues. And then we have a Fed who comes in and says "we're going to help, we're going to raise rates to ostensibly squash this particular inflation, which is predominantly related to food and fuel in our regulations on our corporations and what they can charge in the process and we're going to do something about it." But the reality is all they have done is create a situation right now where rents are escalating relative to people's mortgage payments, which means more people are shut out from borrowing money to buy a home. The cost right now of purchasing a home and getting out a mortgage is double what it was in March. Real people in the real economy can't afford to do that. As a result landlords, the sort of corporations like private-equity hedge funds - the BlackRocks of the world - that own a significant amount of real estate, as well as landlords who just have a lot of properties because they were wealthy and they had more money to leverage to begin with or more access to it can jack up those rents as well.

So now we're in a situation where on every side people are getting hurt by the institutions like the Fed and also by the supply chains, geopolitics. And, again, the leverage of those institutions like Wall Street. Banks just had earnings come out just now, Rick, and they're doing fine. You know why they're doing fine? Because they're charging more interest, because they can, because now the Fed has raised rates. So they're raising rates on loans, on everything that they can squeeze out of people. They have not by the same amount, of the same proportion, anything near it, raised, for example, savings rates that people who actually could put money into these banks might receive back from the bank. So they're actually playing what we call on Wall Street the spread between what they're squeezing out of individuals as a result of where we're at right now - the Fed attempting to fight inflation by making it more expensive for the real person to to get credit - and on the other hand they're not paying any of that extra interest to people. So they're basically, you know, squeezing them on all sides.

And I don't think people really understand this enough. Because in the media the story is - and the allowability to the Fed is - hey, they've got this. You know, yeah, it's going to cause some pain, as, you know, Federal Reserve chairman Jerome Powell said it's going to cause pain to the economy, but, you know, it's going to cause some job losses, it might make things more difficult. But, you know, we've got this inflation thing, we're going to fight it. Well, no one at the Fed is afraid they're going to lose their job as a result of this policy, whereas people in the real economy are at risk.

RW: Yeah, it was amazing to watch. It reminded me of Harvard announcing it's extraordinary budget and it's 406 million dollar surplus, oblivious to the fact that the world is announcing it to is fully aware that they don't pay a nickel of tax for this, having served the richest people in the world for all as long as they've been around.

It boggles the mind, this Powell talking about pain. It will be pain for the hundreds of thousands, if not millions, who lose their jobs. You know, I'm an economic historian. The last time we had a bad inflation we fought it with a wage/price freeze. The time before that when we faced it we fought it with rationing (early in the 40s.) That they don't discuss these options, that they don't even explore the social costs and benefits is a sign that they want nothing to do with any kind of open or honest discussion of what these realities are, such as those your book brings forward. They want to be able to push ahead. And they leave me, and I want your reaction, with this sense that the end of empires usually are described later as people blinded to the conditions and just roaring ahead with what's made them wealthy, not realizing that they were about to kill the goose that laid their own golden eggs. Anyway, what do we do about all of this? What's your proposal, in the few seconds we have? What do you do about such a situation?

NP: Well, I mean it's tough. I mean because we want to have a decentralized financial system, which we don't have because there's so much control on the centralized aspects of it, on the Fed. I truly think if we just focus on the Fed, because they have been, I think, the major player in all of this, with all of the political tentacles that indicates, with all the Wall Street connections, with all the favoritism to companies getting that money cheap... The Fed is not an elected body, it is a body that is appointed, its leaders appointed. It has no accountability, no responsibility, it has no accessibility to people. Yet it impacts our lives. So the one thing, I think, is to make that at least a democratic institution on some level. And also to keep talking about these issues, the real stories here.

RW: Nomi Prins you're a wonderful storyteller about all these things. Keep up your wonderful work and I hope we can get you back here in the future.

NP: Thank you.

RW: And to my audience I look forward to speaking with you again next week.

Transcript by Brendan Tait

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About our guest: Dr. Nomi Prins is a former Wall Street executive, who worked as a managing director at Goldman Sachs in New York, and as a senior managing director at Bear Stearns in London, as well as holding posts at Lehman Brothers and the Chase Manhattan Bank. She left Wall Street to become an investigative journalist, author, international speaker and advisor on financial-economic matters. She has written six books, including her latest book Collusion: How Central Bankers Rigged the World. Her other books include All the Presidents' Bankers: The Hidden Alliances that Drive American Power,  Black Tuesday, It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street, and Other People’s Money: The Corporate Mugging of America.  

Nomi’s new book: Permanent Distortion is out now. Leveraging her practical expertise and academic knowledge, she coined the concept Permanent Distortion as a way to educate readers on the gap between the financial markets and the real economy, and what it means for everyone’s future. 

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Showing 2 comments

  • pasqual digesu
    commented 2022-11-17 01:37:49 -0500
    Very good show and guest. The answer to the final question of this program; You move from a financial powers controlled central government to an authoritative controlled central government which represents justice and the peoples best interest (which does not include the peoples greedy demands beyond health and security, which further empowers the present system). We can also continue to sleep through it and hope someday to wake up and find everything hunky dory.
  • Edward Dodson
    commented 2022-11-16 15:23:17 -0500
    I make the argument that the basis for the maldistribution of income and wealth in the United States began almost as soon as Europeans stepped on the coast of North America and began to claim and settle the land. George Washington became perhaps the wealthiest American of his era as a result of his land speculation activity. There were many other “first families” who trace their fortunes to this same activity. Economic historians document that until well into the 19th century the primary economic activity engaged in by Americans was speculation in land. Most of the fortunes of the late 19th century and early 20th century came from the very generous land grants provided by the U.S. Congress and state legislatures to railroads and other businesses.
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