From the Treaty of Detroit to Goldman Sachs
Last Friday, the United States’ Securities and Exchange Commission (SEC) opened a fraud investigation against Goldman Sachs, the largest investment bank on Wall Street (and in the world). The accusation is related to the marketing of securities backed by subprime mortgages, such as those that generated the financial crisis of 2008.
The indictment had an earth-shaking resonance in the financial markets. And it is no wonder, since Goldman Sachs’ (G.S.) business operates with astronomical figures and, until recently, was the central model for global financial innovation. Today, there are many suspicions weighing on G.S., beginning with its possible complicity in disguising the true amount of debt of the Greek economy.
G.S. is the product of the structural transformation of the U.S. economy over the past 60 years. It is the crystallization of the true spirit of neoliberalism, which invests and operates in the financial area, where a mythical hen lays golden eggs called speculation every second. In this world, profits multiply endlessly and there is no need to soil one’s hands with machine oil, clay soils, or much less with the worker’s stained overalls.
The history of G.S. goes hand in hand with the evolution of income distribution in the past six decades. Research on income distribution in the United States shows that the average disposable income (measured in constant dollars in 2006) of 99 percent of families increased from $21,000 to $40,000 per year between 1945 and 2006. In comparison, the average disposable income of the upper one percent of American society went from $250,000 to $900,000 per year during the same period.
These figures summarize the economic and social history of the United States: the stagnation in the purchasing power of the mainstream society after the decade of the seventies and its mirror image, the extraordinary concentration of income and wealth in a privileged class that is continually shrinking. It is the path of the expansion of the financial sector and its extraordinary power, which is capable of subduing the rest of the economy and macroeconomic policies to subordinate their interests. Exactly how this result was achieved is the subject for an investigation of much greater means, but the major stages of this story are clear.
First, a social pact emerges from the turbulent thirties and World War II. These were the golden years of the Treaty of Detroit, the most important labor agreement after the war, signed between the United Auto Workers (UAW) and the Detroit Big Three (Ford, G.M. and Chrysler) in 1950. For this collective agreement, the UAW committed to restrict their right to go on strike in exchange for salary adjustments indexed to inflation, significant advantages related to health benefits, retirement packages, dismissals and holidays. This arrangement was the model followed by other industries for 20 years, until the mid-1970s. It is because of this pact that almost all of the increase in average income available for 99 percent of the households mentioned above took place between 1955 and 1975.
The second stage corresponds to the stagnation in the rate of profit of the core industries of the U.S. economy during the late '60s. This was the cause for the onset of the offensive of capital against the working class in the '70s, in an effort to change the pattern of income distribution. This led to the gradual dismantling of the institutions that held the social pact of the postwar era, and sustained the pattern of growth for wages. Reagan broke the air controllers' strike, inaugurated a new stage in the struggle against unions and, from then on, it was farewell to the Treaty of Detroit.
In the third stage, we had the expansion of the financial sector. The wild deregulation of the financial sector was a response to the stagnation of profitability in the real sectors (non-financial). It was also a response to the challenge that was taking shape on the horizon, for the revival of German and Japanese economic power since the sixties. Financial neoliberalism allowed the United States to regain and extend its hegemony over the last third of the twentieth century. The big auto companies passed the baton on to the nucleus of Wall Street, with companies like Goldman Sachs at the head.
Epilogue: Given this background, the investigation of G.S. is a pittance. The object of the alleged fraud is the sale of securities backed by subprime mortgages, which were undergoing simultaneous bets predicting the collapse of their price. The gossip around the corridors was as if someone were selling a car with defective brakes and, at the same time, took out insurance on that vehicle. That is not illegal on Wall Street, but it also doesn't show much class.
The indictment had an earth-shaking resonance in the financial markets. And it is no wonder, since Goldman Sachs’ (G.S.) business operates with astronomical figures and, until recently, was the central model for global financial innovation. Today, there are many suspicions weighing on G.S., beginning with its possible complicity in disguising the true amount of debt of the Greek economy.
G.S. is the product of the structural transformation of the U.S. economy over the past 60 years. It is the crystallization of the true spirit of neoliberalism, which invests and operates in the financial area, where a mythical hen lays golden eggs called speculation every second. In this world, profits multiply endlessly and there is no need to soil one’s hands with machine oil, clay soils, or much less with the worker’s stained overalls.
The history of G.S. goes hand in hand with the evolution of income distribution in the past six decades. Research on income distribution in the United States shows that the average disposable income (measured in constant dollars in 2006) of 99 percent of families increased from $21,000 to $40,000 per year between 1945 and 2006. In comparison, the average disposable income of the upper one percent of American society went from $250,000 to $900,000 per year during the same period.
These figures summarize the economic and social history of the United States: the stagnation in the purchasing power of the mainstream society after the decade of the seventies and its mirror image, the extraordinary concentration of income and wealth in a privileged class that is continually shrinking. It is the path of the expansion of the financial sector and its extraordinary power, which is capable of subduing the rest of the economy and macroeconomic policies to subordinate their interests. Exactly how this result was achieved is the subject for an investigation of much greater means, but the major stages of this story are clear.
First, a social pact emerges from the turbulent thirties and World War II. These were the golden years of the Treaty of Detroit, the most important labor agreement after the war, signed between the United Auto Workers (UAW) and the Detroit Big Three (Ford, G.M. and Chrysler) in 1950. For this collective agreement, the UAW committed to restrict their right to go on strike in exchange for salary adjustments indexed to inflation, significant advantages related to health benefits, retirement packages, dismissals and holidays. This arrangement was the model followed by other industries for 20 years, until the mid-1970s. It is because of this pact that almost all of the increase in average income available for 99 percent of the households mentioned above took place between 1955 and 1975.
The second stage corresponds to the stagnation in the rate of profit of the core industries of the U.S. economy during the late '60s. This was the cause for the onset of the offensive of capital against the working class in the '70s, in an effort to change the pattern of income distribution. This led to the gradual dismantling of the institutions that held the social pact of the postwar era, and sustained the pattern of growth for wages. Reagan broke the air controllers' strike, inaugurated a new stage in the struggle against unions and, from then on, it was farewell to the Treaty of Detroit.
In the third stage, we had the expansion of the financial sector. The wild deregulation of the financial sector was a response to the stagnation of profitability in the real sectors (non-financial). It was also a response to the challenge that was taking shape on the horizon, for the revival of German and Japanese economic power since the sixties. Financial neoliberalism allowed the United States to regain and extend its hegemony over the last third of the twentieth century. The big auto companies passed the baton on to the nucleus of Wall Street, with companies like Goldman Sachs at the head.
Epilogue: Given this background, the investigation of G.S. is a pittance. The object of the alleged fraud is the sale of securities backed by subprime mortgages, which were undergoing simultaneous bets predicting the collapse of their price. The gossip around the corridors was as if someone were selling a car with defective brakes and, at the same time, took out insurance on that vehicle. That is not illegal on Wall Street, but it also doesn't show much class.