Reviving the Big Labor - Wall Street alliance of the New Deal

In the comments to a post below, there's some discussion of how the Democrats can bring the working class back onto their side and become the dominant rather than opposition party.

In this comment, I review the argument I've been making for awhile here about how the next New Deal phase of the cycle is still a ways off.

But as for nearer-term solutions, I'll just cut-and-paste the comments here. The first is about how de-industrialization has destroyed the upper tiers of the finance sector, as well as the labor unions and working class, giving them a common cause to unite around. The second is about de-escalating the arms race within the finance sector itself, which was begun by the lower and middle-tier finance orgs circa 1980, not the Wall Street investment banks at the top of the pyramid, who only deregulated as a reaction to those below, 20 years later.

If you want to comment, do so to this post, as the other one is old by now and has a moderated comment section.

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Concretely in the short term, unions and populists should highlight to the big banks and central bank how unfair it is that the manufacturers have moved so much production outside the country, where it can't be taxed, leaving Wall Street and Silicon Valley to have to pick up more of the tax tab for funding our government.

And aside from current spending, our government has taken on enormous debt since 1980, compared to surpluses under the New Deal, because mfg owners and their vast working class can no longer be taxed to pay immediately for govt, leading to debt instead.

All that debt will wreck the finance sector -- either by them having to monetize that debt, or by defaulting, either one ruining the credit score of our central bank. Their financial assets become worth a whole lot less (they're denominated in dollars, which become funny-money under such printing schemes).

Also, with less and less real production being done here, the central bank has had to fill the void by injecting more and more monetary stimulus in order to "keep the economy going". But since it's just a bankers' bubble, it's not real, and will pop. That's not an emergency, "lender of last resort" function -- they're being used as an emergency every day for 40 years.

De-industrialization is to blame for that, since industrial-scale manufacturing is an organic and endogenous source of job creation with good wages. No need to stimulate constantly -- only now and again when the credit cycle tightens. (There was not a single bubble during the New Deal era.)

And of course, finance cannot provide the jobs themselves -- they are not labor-intensive, and will never be hiring in large numbers. Only labor-intensive employers can fill the void -- but with de-industrialization, that means shitty service jobs.

Industrial mfg has high profits margins, meaning if employers compete for workers, they have to pass along a lot of that profit to workers in wages. Retail, food, etc., are very low-margin activity, and leave little for employers to pass on. Only industrial mfg is both high-profit margin, and labor-intensive / high employment numbers. That alone can sustain a modern welfare state and economy.

There's likely more to the story, but that's the basic pitch. De-industrialization has thoroughly compromised the finance sector, all the way to the top, in stark contrast to the stable finance system of our industrial mfg heyday under the New Deal.

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As for concrete solutions in finance, the increasing precariousness was caused by deregulation since 1980. And that did NOT benefit the big Wall Street investment banks -- they did not get deregulated until the late 1990s.

Rather, early neolib deregulation was about "liberating" the middle and bottom tier financial orgs to claw their way up the pyramid to take on the stodgy old investment banks. Regional banks like Continental Illinois, the entire Savings & Loan sector, hedge funds, private equity (leveraged buy-out, corporate raiding), barely existed before 1980, let alone were they running riot.

That's who was soaring off the charts during the '80s and most of the '90s. It was all fake, so they kept going bust, but for awhile the investment banks did not have to bail them out. Continental Illinois was bailed out by the FDIC, the whole Savings & Loan sector by a special act of the federal government.

But when a big hedge fund, Long Term Capital Management, went tits up in the late '90s, it was the Wall Street investment banks who had to bail it out. Imagine that -- this new breed of finance animal has been unshackled and eating your lunch for 15-20 years, and then when one of them kicks the bucket, it's YOU who has to pay for their enormous end-of-life services and funeral costs!

Immediately after LTCM's blow-up and bail-out, the investment banks demanded that they, too, be deregulated. If the middle and lower tier were unshackled, then the top tier had to be unshackled, too, in order to keep from going extinct at the hands of the upwardly mobile breeds.

It was only then that Glass-Steagall was repealed, and investment banks allowed to form into mega-banks.

That mega-ness directly caused them to blow up and need bailing out, in 2008. One didn't even make it -- Lehman Brothers. Think of it: every fly-by-night S&L from the '80s got bailed out, and now it was clear the upstart hedgies would always get bailed out. But one of the oldest investment banks on Wall Street? Sorry, don't count on it.

Now our central bank has gotten too big to fail, after jumping on a nearly 5 trillion-dollar grenade in order to "save the economy" after 2008. But it still has 80% of the shrapnel embedded in its body, meaning it can't absorb another blast -- and the next blast will be much bigger than 5 trillion. When the current bubble pops, the Fed will have a whole new order of magnitude of liabilities on its balance sheet, in the 10s of trillions of dollars.

And there is no higher bank to bail out the central bank that prints the world's reserve currency. No central bank of Planet Earth. No central bank of the solar system. No central bank of the Milky Way. No intergalactic central bank. No central bank of all parallel dimensions. This is, at last, the end of the line for bubble-blowing.

In order to de-scale the Wall Street mega-banks, we have to level the middle and lower tier of the finance world. That's where all the problems started. Impose regulations that put those actors back where they belong, where they're not challenging the investment banks at the top. Once its safe, the mega-banks can shrink back into Glass-Steagall style investment banks.

Big labor and their workers will have no problem with any of that. They don't thrive from the S&Ls, corporate raiders, and hedge funds -- if anything, they've gotten downsized into oblivion by them (private equity).

It can be sold as "all actors in the finance sector will be taking on a smaller role, and reining in their deregulated free-for-all behavior". But the real action will be caging up the sub-investment bank tiers, who started the arms race in the first place. De-escalation of the finance arms race -- a nice way to sell it to populists.

Again, only Dems can pursue that -- they're controlled by the Wall Street mega-banks and central bank, while the GOP was controlled by the formerly low/mid-tier finance orgs who wanted to take on the big boys from Wall Street (S&L, private equity).