‘Rentiers’ are at root of 1 percent

By Charles R. Morris
March 12, 2014

The American public is catching on that almost all the benefits from the still-fragile U.S. recovery have gone to the top 1 percent of earners. One sign is that “inequality” has suddenly become a fighting word. Legendary venture capitalist Tom Perkins recently denounced the “demonization” of the rich — and was quickly forced to apologize for comparing it to Kristallnacht.

Perkins is too sensitive. He is one of the creators of the U.S. venture capital industry, and played a big role in nurturing the hardware and software revolutions that made the United States so dominant in high technology. Americans admire people like Perkins, who earned their wealth — whether they are financiers like Warren Buffett or George Soros, entrepreneurs like Bill Gates and Steve Jobs, or superstars like Michael Jordan.

But Americans abhor “rentiers” — unproductive citizens who make good incomes by collecting tolls on other people’s production. In the early days of economics, rentiers were the owners of stagnating estates who partied in London on the earnings of their peasants and tenant farmers.

More recently, they are the beneficiaries of special privileges, like the web of congressional protections that protect sugar farmers from international competition. Or they have effective monopolies. Can anyone imagine that the Internet would have grown so explosively if AT&T still ruled American telecommunications?

Rentiers profit from falling productivity, preserving their privileges on the backs of the rest of us. John Maynard Keynes once mused that economic progress would require the “euthanasia of the rentiers.”

The special animosities felt toward the big banks stems from the feeling that they are rentiers — sitting athwart the sluice gates of global finance, dipping out bucketsful of glittering tolls from the passing stream.

There is a lot of evidence to support that view. The financial sector, for example, accounts for just under 10 percent of U.S. gross domestic product. But for much of the 2000s, it consistently captured between 30 percent to 40 percent of corporate profits. Bank earnings tanked in 2007 and 2008, of course, but by 2009 they were once again claiming 30 percent of profits. So the penalty for causing a global financial thrombosis was just a couple of off years, and then back to the big bonuses — as the rest of the economy still struggles in the mire.

The U.S. financial sector enjoyed astonishing growth in the 2000s. From 2001 through 2006, the seven biggest banks doubled their assets and tripled their net profits, while the real economy poked along at an annual growth rate of only 2.9 percent. The bankers took advantage of easy money, financial deregulation, and a hunger for yield on the part of wealthy investors to construct a vast wheel of credit that generated outsized fees at every turn.

Reckless finance drove up the price of houses, and supported a big increase in consumer credit. From 2001 through 2006, Americans borrowed $3.5 trillion against their houses, net of any mortgage paydowns. Over those same years, the U.S. trade deficit, which was heavily consumer-driven, increased by $3.1 trillion. The biggest beneficiary was China, which used the windfalls to accelerate its rise to economic and military parity with the United States.

On the corporate side, the private equity industry has thoroughly financialized most large American companies. Executive tenures are short, the share price is the sole metric, and share-based compensation schemes have increased the executive-to-worker pay ratio by 100 times. Buyout firms pile on debt, cut costs and narrow focus to jack up earnings in the hope of selling the property back to the public markets.

The private equity footprint is now so large that most companies have adopted that behavior pattern. So cash piles up on corporate balance sheets, employees are utterly disposable, and investment lags.

For their success in inflicting such strategies, two leading private equity moguls, Stephen Schwarzman of the Blackstone Group and Leon Black of Apollo Global Management, between them took home more than $1 billion in compensation in 2013. Rubbing it in, they will pay lower marginal tax rates than the typical upper-middle-class American family.

Unproductive churning that benefits no one but the churner sucks the resilience out of an economy. The poster boy for financial churning, perhaps, is the old Merrill Lynch. From 2001 through 2007, it booked more than $100 billion in revenues. Consistent with contemporary practice, half was paid to employees, largely to the most senior levels. In 2008, Merrill was suddenly on the brink of insolvency. It agreed to a shotgun wedding with Bank of America. When the accountants had sifted through all the rotten paper on Merrill Lynch’s books and totted up the losses, it turned out that from 2001 through 2008, despite the terrific profits made during the financial boom, Merrill had earned a negative $21 billion.

This must be some sort of record in the annals of unproductiveness. Just before the deal with Bank of America closed, however, Merrill still paid out $3.6 billion in bonuses. Roughly 700 employees received payouts of more than $1 million each.

Such are the rewards of dead weight. Opposing the rentiers, in all their forms, is not the same as opposing wealth, honestly earned. It’s not envy, and it’s not sour grapes.

We need a well-functioning financial system. But not one that misallocates resources and generates crises and instability. The banks, however, are fighting a quiet, but grim, take-no-prisoners war in Congress and before the regulators to preserve their old privileges.

This is a battle the public cannot afford to lose. Rooting out the rentiers is essential for the future health of the country.

 

PHOTO (TOP): From left to right, Lloyd Blankfein, chief executive of Goldman Sachs Group, Jamie Dimon, chief executive of JPMorgan Chase, John Mack, chairman of Morgan Stanley, and Brian Moynihan, chief executive of Bank of America are sworn in before their testimony at the Financial Crisis Inquiry Commission’s first public hearing in Washington, January 13, 2010. REUTERS/Jason Reed

 PHOTO (INSERT 1): Stephen A. Schwarzman, chairman and chief executive officer of The Blackstone Group, speaks during an interview with Maria Bartiromo, on her Fox Business Network show; “Opening Bell with Maria Bartiromo” in New York, February 27, 2014. REUTERS/Brendan McDermid

PHOTO (INSERT 2): The Merrill Lynch logo is seen on a building in New York, May 7, 2012. REUTERS/Keith Bedford

17 comments

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Obviously, it’s time for a socialist revolution…

Posted by UrDrighten | Report as abusive

Excellent opinion piece. It is about time such clarity of thought started to make its way into the public’s consciousness. Some measures will have to be taken to stop free-for-all feeding from the trough, but another thing that is needed is a reset, which I suggest in the for of 100% death tax on local assets over a 1 million dollars per child/wife.

Posted by BidnisMan | Report as abusive

UrDrighten – far from a call towards socialist/communist Marxism this a call for capitalism done right. What is really happening is there is a parasite feeding off the back of main street America, making it weak. Call them ‘rentiers’ or ‘bankers’ or whatever but the fact remains they do not add value to the economy – they only find innovative ways to soak up value created by others – which will this might be innovative and entrepreneurial is it is only so in the same way that thieves and con-man can be given those labels.

Posted by BidnisMan | Report as abusive

British government tried to regulate investment, forcing the banks to disburse funds to the market (supposedly, to businesses in desperate need of capital, after an effective run on the capital markets).
The result? A near millionaire friend of mine, a private-practice dentist, was bullied by his bank manager to accept — get this — a loan for an extension on his house — at something like a 1%–2% interest rate on the mortgage!!! My friend had the money in the bank to pay for the extension outright; but took the mortgage anyway because the terms were so good! He kept his own cash in the bank or in stocks and shares instead, earning a much higher rate of interest.
There’s no explanation for this behavior at all; except if the bank was trying to fulfil the letter of the regulatory requirements they were under, without fulfilling the spirit of it…

Posted by matthewslyman | Report as abusive

Our legislators, in continue to allow abusive and non-productive practices of rentiers, and judges allowing money as free speech, are only planting the seed of revolution.

Capitalism with restraints on abuses is good, but without these restraints, wealth and the wealthy are finding themselves targets.

Posted by Flash1022 | Report as abusive

A decade or two ago, there was concern about the decline of American manufacturing. The banker replied that this was not really so much of a concern because the US led the world in the creation of new financial products.

Posted by Bristlecone | Report as abusive

Great article! One can smell the arrogance and corruption emanating from the picture of the “bankers” in this article. They think they’re untouchable but as more and more average people find out how thorougly they have been “fracked” by these criminals there will be serious consequences.

Posted by njglea | Report as abusive

You call them rentiers, they sound a little dirty and foreign, just like French postcards. You call them retirees, maybe you get a little different vibe. Give them zero interest, the dog food is the dog food. Yeah, we get them evil rentiers, and the Government will look after the virtuous working man. Right.

Posted by raymondflores | Report as abusive

Excellent article!
It will take a significant event to cause any real change. Banksters have direct control, or controlling interest in virtually everything. They are above the law, and control government thru their influences. But I think the global economy will suffer a significant setback this year. The Chinese believe so too. Perhaps it will be large enough to cause “joe six-pack” to not be able to afford his six-pack, cable, and flat screen. That will be a big enough event.

Posted by tmc | Report as abusive

The first thing to do is separate deposit institutions from the investment banking world. Reinstate Glass-Steagall. The second is to reduce the influence of big bucks in politics. Corporations are not people. Free speech in the constitution was intended to protect the voice of the little guy and prevent having his voice overwhelmed (or eliminated) by the aristocracy (or their modern equivalent – the ultra rich).

Posted by QuietThinker | Report as abusive

But we are astounding in our passivity. Perhaps because any institutionalize/governmental push back will trigger retribution in the form of severe contrived economic downturn. What is needed is education. You are not require to bank with BoA or BoE etc. and can deal locally. You all can make changes that will bleed them dry. Watch the change in attitude as you shrink their incomes. Ah but alas, the brainwashed out number the free. Our education system is by and for the wealthy. The true history of ourselves is not even taught.

Posted by brotherkenny4 | Report as abusive

“Such are the rewards of dead weight. Opposing the rentiers, in all their forms, is not the same as opposing wealth, honestly earned. It’s not envy, and it’s not sour grapes.”

The powerful will continue to confuse this point; they want the productive people of America to think they are on their side while the suck the blood out of the economy. And half the population has bought it. They rally against the poor single mom who needs help while the real parasites laugh in their penthouse.

Posted by anarcurt | Report as abusive

As if Congress would come to the aid of and champion the cause of the “little guy” against the robber barons of the banking and finance industry when those same robber barons get elected every term. Gimme a break! Politicians are in the back pockets of bankers and vice versa. Ultimately, they both come from the privileged class and either you’re in or you’re not. Altruistic idealism aside, there is no collective ideal without morality and morality is a subjective term in a relativistic society. You certainly can’t litigate morality.

Posted by wooleyes | Report as abusive

A Revolution is hardly necessary. The intentions of the Founders of the USA are enough to solve this problem. They abhorred aristocratic wealth passed from generation to generation, and assumed all should produce enough for their needs during their own lives. Force the rich back to work and this crisis ends itself. A large death tax is the responsible, in fact the American, solution to the decadence and decline of European Monarchies, as in 1776, so it is today

Posted by Benny27 | Report as abusive

After USA abandoned capitalism for corporatism in 1933, sound economics have not been taught in USA schools. Lord Keynes used to blame ‘rentiers’ for bad economy under sound money and capitalism and suggested to kill rentiers via government inflation. Keynesian economics (non-stop inflation that drives the poor and elderly further into poverty and destroys long-term private capital and thus jobs) is the economic model in USA and EU since 1930′s. Complaining about ‘Rentiers’ today is the sign folks do not understand economics and cause & effect that govern economic life.

Posted by SoundMoney123 | Report as abusive

Don’t let the big words fool you — Mr. Morris is not that bright. He would do well by going back and re-reading the fundamentals of the banking system and how they relate to the american economy, Likening banks to “economic skimmers” is analogous to saying that John Deere drives up food prices because it charges for the farm equipment it manufactures. Do you suppose that Tom Perkins ever took out a business loan, or a mortgage, or raised capital for a business through a bond issuance, or maybe even did an IPO? Funny, seems like the banking system “highly participated” as Mr. Perkins became a self-made man. Can an argument to be made that the big bank bosses bring home obscene paychecks. Sure. But last I checked, people still attend Major League Baseball games, even thought most of the working public can’t afford the price of admission. Does A-Rod get blamed for that, too?

Posted by objectlesson | Report as abusive

America has never had a socialist system where everyone gets a piece of the pie, I’m not sure why at this point you think it’s strange that a minority hold the money, that is capitalism.
In countries like mine, New Zealand, the socialist egalitarian society is disappearing and being replaced with this horrible model – the major underclass and the very small minority that hold all the money. It’s countries that have kept their immigration near zero and have socialist systems that prosper – admittedly there are very few.

Posted by kiwibird | Report as abusive