The extreme inequality… a deliberate feature of the system. Grantham wrote: “We can measure the rapid increase in inequality since 1997, which has left the US as the least equal of all rich countries and … with the lowest level of economic mobility.
One might reasonably surmise that the critical inflection point* came after the 1997 Asian Financial Crisis via the singularly most corrupting catalyst in the history of modern capitalism, the bailout of insanely-leveraged Long Term Capital Management (LTCM) by actions of the US Federal Reserve.
The ordinary rules of bankruptcy were suspended from operating (and the universal laws of insolvency were prevented from application to the 1%) by the Fed’s actions protecting the elite bankers and clients swept up in the bad bets of LTCM. The nullification and repeal of principles of bankruptcy for the 1% occurred when LTCM was bailed out in 1998, protecting it and its participating banks from a well-earned collapse.
This diabolical act of protecting the highly leveraged LTCM hedge fund from going bankrupt created a permanent divide between the elite of the 1% (a protected class) and everyone else on the planet. This creation of a “protected class” of individuals and institutions against the principles of insolvency was exacerbated by passage of the Gramm-Leach-Blyley Act of 1999 (so-called “Financial Modernization Act” or FMA), gutting Glass Steagall and allowing the unholy union of banks and insurance companies.
The LTCM bailout and the official sanction of the creation of an entirely new class of entity under control of the 1% - namely, the “Too Big To Fail” (TBTF) institutions - the elite among who were the “Primary Dealer Banks,” and their management and largest clients, all of which were given license to “front run” the Federal Reserve’s Permanent Open Market Operations (POMO), continually enriching themselves at the expense of US Taxpayers.
Upon the subsequent passage of the Commodity Futures Modernization Act of 2000, the TBTF Primary Dealer Banks, their management, and largest clients, together with elite 1% traders and speculators in the mold of LTCM, all were gifted with the ability to create, package, trade, and speculate in derivative instruments with virtually unlimited leverage.
This allowed the elite among the 1% to expand the class of TBTF (Too Big To Fail) entities, so as to permanently institutionalize and approve of “Moral Hazard” as the cardinal rule by which the 1% was and is allowed to play in the financial markets.
Ordinary companies, shareholders, bondholders, savers, and retirees all are subject to the laws of bankruptcy, by which they will be stripped of their assets and reduced to meager living in the event of insolvency or operation of mark-to-market asset rules.
However, the 1%, especially the Primary Dealer Banks, their affiliates, senior and retired management, as well as their largest clients - are deemed TOO BIG TO FAIL - shielded from failure by an implicit and explicit backstop from the Federal Reserve and the US Congress (granting Goldman Sachs an overnight National Bank charter so as to protect Treasury Secretary Hank Paulson’s retirement nest egg), via the Bank Bailout of 2008.
This series of events, changes in the laws, schemes, and practices of the Federal Reserve, designed to provide a permanent bankruptcy-protected “preferred class” or “preference” in favor of the elite among the 1% (no matter how many bad bets they make), while relegating the rest of the world’s economic participants to a permanent underclass, always at risk of insolvency and bankruptcy for making a bad bet.
Shortly thereafter, in 2005, Congress even changed the rules of bankruptcy to further prejudice the poorest among us by the Bankruptcy Abuse Prevention and Consumer Protection Act, protecting the 1% and the Too Big to Fail Banks from losses at the expense of the poor insolvent borrowers.
The global financial system is a rigged game of poker where the 1% is guaranteed to win.
“If you’re playing a poker game and you look around the table and can’t tell who the sucker is, it’s you.”
*An earlier inflection point was when the Fed allowed Citibank and other elite banks to ignore mark-to-market principles in valuing their exposure to losses in Latin American debt during the Latin American Debt Crisis of the 1980s.
The Fed itself acknowledges this instigation of moral hazard in its recorded history:
In the United States, the chief concern was the soundness and solvency of the financial system. To that end, regulators weakened regulatory standards for large banks exposed to LDC debt to prevent them from becoming insolvent… But allowing those institutions to delay the recognition of losses set a precedent that may have weakened market discipline and encouraged excess risk-taking in subsequent decades.