From Wall Street to Main Street

We use the phrase “virtual wealth” to refer to value that resides more in the mind than in reality, or in the digital hard drives rather than in granaries, silos, warehouses and vaults, and we have David Korten to thank for the more colorful phrase “phantom wealth” in the subtitle of his Agenda for a New Economy, now in its second edition. Written with deliberate speed shortly after the 2008 election but before the inauguration of President Obama, Korten is known for his push for people-centered development against the backdrop of a global rule of corporations and their unregulated wealth-creating systems.

We’ve been repeatedly asked to say some more about “phantom wealth” so we will lift off portions of Korten’s book on the subject. On page 28 of his Agenda, he writes: “Also called illusory wealth, this is wealth that appears or disappears as if by magic. The term generally denotes money created by accounting entries or the inflation of asset bubbles unrelated to the creation of anything of real value or utility. The high-tech-stock and housing bubbles are examples.”

In a letter to the Saipan Tribune, a reader wondered how the builder of a twin structure that houses the BoH on Chalan Pale Arnold survives, considering its proximity to the Puerto Rico dump and the rickety CUC power generating plant. It is, however, also close to the manicured grounds of the AMP, the marina, and the high-income condos and apartment units of Anaks, thus not difficult to market the amenities and accommodations of the imposing office buildings, more so if one has connection to a prominent bank to underwrite cost, and to federal offices, foreign legation stations, prominent barristers, etc. for prestigious tenants.

In any case, real estate development, which flourished everywhere in the urbanization that followed WWII, is now the engine of financial growth in many parts of the world as natural resource rich economies and extractive industries anticipate depletions and diversify investments.

One recalls the instant wealth that descended coastal land owners when value shot up meteorically with the influx of the ¥en after the Reagan administration “adjusted” the $ in the ’80s. CDA’s record on loan delinquencies attests to the unfamiliarity of borrowers to judicious financial management, though, of course, we also have the added practice of living off seemingly endless government funds without provisions of repayment, or even bothering to make the investments profitable.

Korten continues: “Phantom wealth also includes financial assets created by debt pyramids in which financial institutions engage in complex trading and lending schemes using fictitious or overvalued assets as collateral for loans in order to feed and inflate asset bubbles to create more phantom collateral to support more borrowing to further feed the bubble to justify outsized management fees.” These are the various incarnation of the Ponzi operation. Recession 2008 was a recent result.

We recall the hotel construction boom in early Marcos’ martial law in the Philippines. The DBP (Development Bank of the Philippines) extended generous terms toward the construction of 4- to 5-star hotels to accommodate delegates of a World Bank conference that saw the installation of tall billboards en route from the international airport to the new hotels to hide the reality of the slums along the way from conference delegates’ view. (Useless since the view was accessible from hotel windows!)

With low equity requirements, construction companies availed of the loans, erected the buildings on a separate contract, and further contracted themselves as hotel management. Construction companies easily recouped their initial investment even before the opening of business, and could afford to be oblivious to operational costs since partner DBP’s coffers was generous, and Imelda was eager to please. Shortly after the conference was over and the bubble burst, the people’s bank was left holding the liabilities, but the company officers had already paid themselves “performance” fees and audit-verified gains at the start.

“When the bubble bursts,” Korten continues, “borrowers default on debts they cannot pay and the debt pyramid collapses, along with the bubble, in a cascade of bankruptcies.” Sounds familiar? “Those who had no part in creating or profiting from the scam are then left to absorb the losses and to sort out the phantom-wealth claims still held by the perpetrators against the marketable real wealth of the larger society,” Korten adds as he delivers the coup de grâce: “It is all legal, which makes it a perfect crime.”

The perfect crime during the garment industry heyday, in addition to the exploitation of docile workers’ time and pay, included the luring of imported workers into non-existent jobs at high premium paid up front to recruiters and factory heads. I assisted a worker get back to China after she doled out $6,000 just for a tourist roundtrip ticket facilitated by a compatriot agent with a local government official as a the sponsor on record, with a vague promise of a job. I found out later that the local official regularly consumes “ice,” so the crime committed was not just white-collar; it extended to the nooks of bloodthirsty greed and relentless corruption.

Chapter 5 of Agenda deals with the main meat of the book, on what the Wall Street wants. Let’s reserve that for a forthcoming reflection.