Horses, Stocks, and Booze: Calculating the Losses of the Financial Crisis

Kate’s is a local bar in a far northeast corner of the Bronx.  During the day, elderly patrons wash away their remaining years in a sea of booze-inspired camaraderie.  I peek in sometimes as much from curiosity as to remind myself of a future I hope to avoid.  A few years back someone changed the television channel at Kate’s.  The seemingly timeless link between booze, the aged, and horse racing was suddenly severed.  Off Track Betting was replaced by CNBC.  Hazy patrons now seemed more concerned with 401k values and hot stock tips than who was running in the 7th at Aqueduct.  This change seemed, at the time, to suggest a final victory for the marketplace.  Now, as the economic miracle of Wall Street has degenerated into a nightmare of zombie banks, toxic assets, and state bailouts, Kate’s patrons are left to wrestle with a destruction of wealth so monumental that it swept away their stock market illusions.

The enormity of the destruction is brought home by the private equity firm, Blackstone Group, who recently reported that nearly 45% of the world’s wealth had been destroyed in the crisis.  Blackstone CEO, Stephen Schwarzman, described the losses as “absolutely unprecedented in our lifetime.”  The International Monetary Fund (IMF) put the wealth destruction at around $4 trillion dollars, or nearly double the annual budget of the US Federal Government.  The losses are so staggering that even the free-market fundamentalists at the IMF now recognize the need to, “shore up institutions,” “including nationalising them where necessary.”  This advice is all the more remarkable since it comes from an organization whose notorious Structural Adjustment Programs of the 80s and 90s forced governments throughout the world to privatize state-run enterprises.

But, for many, especially elderly workers who depend on monthly pension payments, the IMF’s advice to act decisively and in the public interest is far too late.  There has, for instance, been a 34% decrease in the assets held by the largest pension funds in the country over the last 14 months.  Large funds have shed more than $1 trillion in value during the same period.  Nearly 40% of pension funds now report being, “under-funded,” putting the future of millions of recipients at risk.  These losses have wreaked havoc with state and local governments as they scramble to make up for Wall Street based revenue losses.  New York City, for instance, mandates an 8% annual increase in pension funds.  The City has, therefore, been forced to use scarce public funds to fund the entire increase and cover the negative returns of stock and bond investments.  It seems that the TARP is not the only way private investors are fleecing public funds — state and local tax funds are equally profitable targets.

Private 401k’s have also been savaged.  The allure of the 1980s and 1990s bull market attracted trillions in retirement funds.  In many cases, the returns from this period amounted to more than 15% a year.  However, since the turn of the 21st century, Wall Street has produced annual losses of nearly 5%.  As a result, Hewitt Associates LLC, a company which surveys 2.7 million 401k participants, reported that the proportion of 401k assets held in stocks fell from 67% in 2007 to 53% in 2008.  This was not the result of changes in allocation by participants — remarkably most 401k’ers continue to favor stock investment.  Instead, the shift came from market-based wealth destruction which has accelerated over the last year and a half.  Despite this, individual workers continue to pour their 401k money into the market, providing a monthly bonus to Wall Street speculators seeking to lay off losses on the public.

Of course, the market-invested pension funds and 401k’s were simply pacifying neoliberal illusions sold to American workers for decades.  Economic reality always dictated a distinction between the productive wealth controlled by the richest 5% of the population and the paper wealth of stock investments — the value of one’s stock account only represented potential — not real wealth.  Yet, irrational hopes and speculative dreams blurred this distinction.  American workers have tended to avoid more contentious issues such as unionization or struggles for wage increases in favor of programs that were far cheaper for their employers.  In the process, their future wellbeing was made heavily dependent on the financial bubble that was Wall Street.  Neglecting struggles on the worksite allowed employers to create low-wage, no-benefit “new economy” jobs on worksites where workers have few rights.  Now, Wall Street has destroyed even the illusions of the market and, with it, the futures of millions of American workers.

The resulting losses have not just been financial.  Significant social stress produced by the financial shock has translated into externally and internally directed violence.  The “Binghamton shooter” Jiverly Wong’s loss of his job at IBM became the immediate trigger for a shooting rampage which claimed 13 victims at an immigration services center.  Wanda Dunn made herself the victim of the stress-induced violence.  Faced with the prospect of being evicted from the home her family had inhabited for three generations, Dunn killed herself with a shotgun and burned the house to the ground.  Such spectacular moments of violence are heaped upon decades of overwork, lack of access to healthcare, deferred worksite struggles, and declining civil rights.  These trends have produced a society defined by human isolation and individualistic survival strategies — one in which a small bar in the Bronx offers the only solace.  All the anti-depressants and counseling sessions in the world cannot paper over the real psychological damage done by capitalist society.

Curious to measure the effects of the financial meltdown, I popped my head into Kate’s the other day.  A crowd of drinkers was again gathered.  This time, however, the conversation revolved around the relative merits of Mayflower or Golden Girl in the 2nd at Yonkers Raceway.  Bar patrons had exacted some symbolic revenge against Wall Street by vanquishing CNBC.  Yet, if this was a victory it was a bitter one.  Gone were the irrational stock market bubble hopes for comfortable retirements.  Gone also were much of their account balances.  In their place were some new bar mates.  Far younger than the rest of the crowd, this group’s beverages were likely paid for with recently printed unemployment checks.  Perhaps these younger workers will be far less susceptible to the illusions sold and ingested by their elders.  One day, the call of the horse races may be drowned out by demands for a society in which a better future is possible.  For now, though, we calculate the losses produced by the chaos of the market with hopes that another world is possible.

Billy Wharton is the editor of The Socialist magazine and the Socialist WebZine.   His article “Obama’s No Socialist.  I Should Know” appeared in the Washington Post in March 2009 and was run in several other publications.  Contact: <>.