Have a piece of news you want us to discuss? Submit it here via this email form and we’ll weigh in on an upcoming episode.
Occupy Wall Street blamed Wall Street for our economic problems. They argued that big banks and corporations corrupt government and direct wealth to the top 1%. Many misread the movement as an aimless anti-capitalist campaign; a protest in opposition to the free market.
Whilst failing to propose a clear agenda for reform, campaigners were direct in their subject of protest: the infiltration of Wall Street into the White House. So long as money dominates politics, we have neither ‘democracy’ in any real sense, nor a market which is truly ‘free’.
Conflicts of Interest
“It’s a Wall Street Government”, concludes Matt Damon at the end of Charles Ferguson’s academy award-winning documentary Inside Job (2011). “And that needs to change.” The film exposed the undisclosed conflicts of interest of economists who present themselves in media and government roles as objective analysts, yet are on the pay-rolls of banks and corporations.
Glenn Hubbard, Chief Economic Advisor of the Bush administration and Dean of Columbia Business School, when probed by Ferguson about the financial services firms he consults for, threatens angrily to close the interview: “You’ve got three minutes,” he sneers. “SO GIVE IT YOUR BEST SHOT.”
Asked, “do you think that Columbia Business School has any conflict of interest problem?” he responds dumbfoundedly, “I don’t see that we do…”
In the lead-up to the 2008 global financial crisis, our most highly-accoladed economists failed to alert us to any danger. They either failed, or chose not to, imagine the bubble bursting. In the wake of the current Eurozone crisis, mainstream economists are once again failing to propose confident solutions to our urgent economic problems.
Once upon a time democracy regulated capitalism. Most banks were local businesses, forbidden by law to speculate with depositors’ savings. Investment banks were small private partnerships handling stock and trade bonding; the partner would invest savings and watch carefully for a return.
Forty years of economic growth without a single financial crisis came to an end in the 1980’s when the financial industry grew exponentially. Elected president in ‘81, Ronald Reagan invited Wall Street to the White House with a motion for national “economic prosperity”. Appointing as his Treasury Secretary Merill Lynch CEO, Donald Regan: together they deregulated savings and loans companies; suddenly allowing banks to make risky investments with depositors’ money.
The investment banks went public, bringing in huge amounts of stockholders’ money, and bankers started getting rich. When hundreds of savings in loans companies subsequently failed, taxpayers were billed $124 billion and many people lost their life savings.
Yet deregulation continued under the Clinton administration, with the support of Alan Greenspan (Chairman of the Federal Reserve), and treasury secretaries Robert Rubin (the former CEO of Goldman Sachs), and Larry Summers (a Harvard economics professor). Once deregulated, banks had the green light to merge; so that by the late 1990s, the financial sector had consolidated into a few gigantic firms, so large that their failure could threaten the whole system.
In September 2008, Lehman Brothers went bankrupt and Merill Lynch was forced to sell itself. In the lead up to the crash, government economists with conflicts of interest had cleared the way for the domination of the US financial services market by five Investment Banks: Goldman Sachs, Morgan Stanley, Lehman Brothers, Merill Lynch and Bear Stearns. Deregulation and the emergence of CDOs (debt instruments or bonds) in a new system connecting mortgages and loans to investors around the world, led to a massive increase in predatory lending.
There was a huge increase in subprime loans (the riskiest type of loan), which are the most profitable products for finance investors. Yet when thousands of subprime loans were combined to make CDOs, the rating agencies, paid by the investment banks to rate CDOs, gave them AAA ratings (the highest rating possible).
The securitisation system meant that when homeowners paid their loans, mortgages went to investors all around the world, who were being sold CDOs by Investment Banks. The high ratings made CDOs popular with retirement funds, which could only purchase highly-rated securities.
Lenders didn’t care anymore about whether a lender could repay so they started making riskier loans. The Investment banks didn’t care either – the more CDOs they sold, the higher their profits. Traders and CEOs got very rich and house prices soared. The bubble had to burst…
A Global recession ensued, costing the world tens of millions of dollars and leaving thirty million people unemployed. The national debt of the United States doubled. The housing market collapsed. Wall Street hung on to its profits, leaving nothing for Main Street.
David Stockman, former budget director of the Reagan administration and early proponent of ‘trickle-down’ economics, (which advocates tax-cuts for the rich in order to stimulate growth and job creation), left government for Wall Street in ‘85. In a recent interview, Stockman spoke out on the rise of “crony capitalism”. Pointing to the 2008 bailout, he argues: “it’s not a free market. There isn’t risk-taking in the sense that if you succeed, you keep your rewards, if you fail, you accept the consequences.”
Where the banks were bailed out by the government, what should have happened, argues Stockman, as it would in a truly “capitalist” and “free market” system, is that “the banks should have been allowed to fail”. That way, the crisis “wouldn’t have spread to the rest of the economy” and “we wouldn’t have had a repeat of the Great Depression”.
Stockman points out that there wouldn’t have been “a run on the banks” because we have “deposit insurance – the FDIC” and it would have given “a lesson to speculators that you’re not going to be propped up and bailed out”. Instead, he argues, the 2008 bailout has given a green light to investors to continue to risk for short-term profit at the expense of national security – because Washington will be there to prop them back up when they flail.
Government defends its protection of the financial industry as part of a determined plan to stimulate ‘growth’. But what good is ‘growth’ if the profits are reserved for Wall Street and guarded from Main Street? We can see now that ‘growth’ signifies growth of the power of corporations – who no longer require a vote of confidence from customers, when government will use public funds to guarantee their risky bets.
The reality is that government has become dependent on the prosperity of the financial industry, the growth machine itself, which now dominates the US economy. Propelled by greed and the desire for power, governments and economists addictively watch stock markets rise and fall with only the pursuit of short-term profit on the agenda. As the world’s treasuries judge the health of their economies by the price of Goldman Sachs, debt accumulation rises and the financial industry loses further touch with reality.
Steve Keen, Professor at the University of Western Sydney, was one of few to speak out about his concerns for a collapse back in 2005. In Episode #39 Keen explains how he identified “the exponential growth of private debt” to be the cause of the financial bubble and its rupture. A self-pronounced follower of Herman Minsky’s economic principles, Keen opposes the accumulation of debt, deregulation policies and the alienation of government from Wall Street dealings.
Keen argues that neoclassical economists (which represent 85-90% of the world’s economists, the heads of university economics departments and the leaders of government treasuries) were (and continue to be) blinded by the apriori notion that in our market economy “agragate demand (the total amount of money that people can spend) is aggregate supply (You’ll only get a chance to buy if you sell something beforehand.)”
However, this way of thinking, he points out, ignores the problem that we live in a credit-based economy. So “aggregate demand is not just relevant to your income – you can also go and max out your credit card.” Thus, “the credit system can expand, so you can get additional debt being taken on without savings.” Neoclassical economists, Keen argues, ignore the significance of debt and so downplay the relevance of banks in the economy, which is “madness”.
“After WWII the level of private debt in America was roughly 45% of GDP”, he points out. The last financial crisis came about when “the level of private debt in American reached 300% that of GDP” as the result of continued predatory lending.
Today’s U.S. and European governments, whilst determinedly forecasting future ‘growth’, continue to spiral into irreparable debt. In this context the practise of economics, as theory expounded to influence public policy, and as subject taught in economics departments, appears to be completely out of touch with the way the world actually works. The flaw in the ‘growth’ paradigm is that it is aligned with a financial system which has no relation to the natural world. As a result, we have an economics discipline which has no relevance to anything.
Fallacy of ‘Hope’
There seems to be a prevailing political conviction that pessimism does not construct the future, and it is therefore better to always offer the public reason to ‘hope’. No-one wants to look the problems, the reality of debt accumulation, in the face. Least of all the Wall Street fat cats.
Obama’s government is a Wall Street government and that has to change. In his election campaign, Obama was explicit on the necessity for “financial regulation” and the need to restore peoples’ trust in the banks. Yet he proceeded to invite Larry Summers (an architect of financial deregulation during the Clinton administration) to direct the White House National Economic Council and Timothy Geithner (leader of the 2008 Wall Street bailouts) to act as Treasury Secretary.
The influence of Wall Street on government continues today to imbalance state support towards financial corporations and away from taxpayers and ordinary citizens. The Stock Act, signed by Obama in April this year in order to prohibit insider trading in Congress, yet which, in fact, fails to restrict members of Congress from using insider information for personal financial gain, has highlighted the extent to which a career in politics may be pursued for financial privilege over the privilege of a public role.
We now have a hopeless situation in which any venture to imbalance government support towards ordinary citizens and away from financial corporations is waived by lobbyists and self-interested economists who have infiltrated government.
Romanticism vs. Realism
In his 1980 election campaign Reagan declared: “There is enough fat in Washington that if it was rendered and made into soap, it would wash the world.” Reagan’s romantic notion was that the accumulation of wealth on Wall Street would signal a new era of national prosperity, high employment and worldwide respect for the American dollar and U.S. flag.
Writing in the Depression era, John Steinbeck’s character precociously observed: “The whole United States ain’t that big…It ain’t big enough. There ain’t room enough for you an’me, for your kind an’ my kind, for rich and poor together all in one country, for thieves and honest men. For hunger and fat.”
It must be easy, within the pearly white walls of the White House, that beacon of a ‘democratic’ western civilisation, to continue to romanticise the idea of a United States as symbol of ‘democracy’ and ‘wealth’. It is for the rest of us to realise that we have lost the capacity for harmonious living; to see that the products of the natural world have become “things” in man’s possession and we have a society which uses scientific knowledge not to learn and share wealth, but to impoverish and increase the risks for all.
It is for the victims of crony capitalism to know, that as long as the 1% are fat, they’ll be hungry.
Hi there Awesome,
Did you know that you are the reason The Extraenvironmentalist exists? Seriously, you are! We make XE because people like you listen, care about, and share these ideas. We are working hard, trying to produce some of the best long format interviews possible. Do you think you could help us out? Here are some of the many different ways you can contribute and keep new episodes of XE coming.