Posted on
Sep 16, 2010
The Great American Stickup
From Chapter 1
“It Was the Economy, Stupid”
To see the first half of the chapter from which this excerpt was taken, click here.
Since the collapse happened on
the watch of President George W. Bush at the end of two full terms in office,
many in the Democratic Party were only too eager to blame his administration.
Yet while Bush did nothing to remedy the problem, and his response was to
simply reward the culprits, the roots of this disaster go back much further, to
the free-market propaganda of the Reagan years and, most damagingly, to the
bipartisan deregulation of the banking industry undertaken with the full
support of “liberal” President Clinton. Yes, Clinton. And if this debacle needs
a name, it should most properly be called “the Clinton bubble,” as difficult as
it may be to accept for those of us who voted for him.
Clinton, being a smart person
and an astute politician, did not use old ideological arguments to do away with
New Deal restrictions on the banking system, which had been in place ever since
the Great Depression threatened the survival of capitalism. His were the words
of technocrats, arguing that modern technology, globalization, and the
increased sophistication of traders meant the old concerns and restrictions
were outdated. By “modernizing” the economy, so the promise went, we would free
powerful creative energies and create new wealth for a broad spectrum of
Americans—not to mention boosting the Democratic Party enormously, both
politically and financially.
And it worked: Traditional banks
freed by the dissolution of New Deal regulations became much more aggressive in
investing deposits, snapping up financial services companies in a binge of
acquisitions. These giant conglomerates then bet long on a broad and limitless
expansion of the economy, making credit easy and driving up the stock and real
estate markets to unseen heights. Increasingly complicated yet wildly
profitable securities—especially so-called over-the-counter derivatives (OTC),
which, as their name suggests, are financial instruments derived from other
assets or products—proved irresistible to global investors, even though few
really understood what they were buying. Those transactions in suspect
derivatives were negotiated in markets that had been freed from the obligations
of government regulation and would grow in the year 2009 to more than $600
trillion. ...
Beginning in the early ’90s,
this innovative system for buying and selling debt grew from a boutique, almost
experimental, Wall Street business model to something so large that, when it
collapsed a little more than a decade later, it would cause a global recession.
Along the way, only a few people possessed enough knowledge and integrity to
point out that the growth and profits it was generating were, in fact, too good
to be true.
Until it all fell apart in
such grand fashion, turning some of the most prestigious companies in the
history of capitalism into bankrupt beggars, all the key players in the
derivatives markets were happy as pigs in excrement. At the bottom, a plethora
of aggressive lenders was only too happy to sign up folks for mortgages and
other loans they could not afford because those loans could be bundled and sold
in the market as collateralized debt obligations (CDOs). The investment banks
were thrilled to have those new CDOs to sell, their clients liked the absurdly
high returns being paid—even if they really had no clear idea what they were
buying—and the “swap” sellers figured they were taking no risk at all, since
the economy seemed to have entered a phase in which it had only one direction:
up.
Of course, this was ridiculous
on the face of it. Could it really be so easy? What was the catch? Never mind
that, you spoiler! Not only were those making the millions and billions off the
OTC derivatives market ecstatic, so were the politicians, bought off by Wall
Street, who were sitting in the driver’s seat while the bubble was inflating.
With credit so easy, consumers went on a binge, buying everything in sight,
which in turn was a boon to the bricks-and-mortar economy. Blown upward by all
this “irrational exuberance,” as then Federal Reserve Bank chair Alan Greenspan
noted in one of his more honest moments, the stock market soared, creating the
era of e-trade and a middle-class that eagerly awaited each quarterly 401(k)
report.
Later, in the rubble, consumer
borrowers would be scapegoated for the crash. This is the same logic as blaming
passengers of a discount airline for their deaths if it turned out the plane
had been flown by a monkey. Shouldn’t they have known they should pay more? In
reality, the gushing profits of the collateralized debt markets meant the
original lenders had no motive to actually vet the recipients—they wouldn’t be
trying to collect the debt themselves anyway. Instead, they would do almost
anything to entreat consumers to borrow far beyond their means, reassuring them
in a booming economy they’d be suckers not to buy, buy, buy.
That this madness was allowed
to develop without significant government supervision or critical media interest,
despite the inherent instability and predictable future damage of a system of
growth predicated on its own inevitability, is a tribute to the almost
limitless power of Wall Street lobbyists and the corruption of political
leaders who did their bidding while sacrificing the public’s interest.
While much has been made of
the baffling complexity of the new market structures at the heart of the
banking meltdown, there were informed and prescient observers who in real time
saw through these gimmicks. The potential for damage was thus known inside the
halls of power to those who cared to know, if only because of heroines like
gutsy regulator Brooksley Born, chair of the Commodity Futures Trading
Commission from 1996 to 1999. When they attempted to sound the alarm, however,
they were ignored, or worse. Simply put, the rewards in both financial
remuneration and advanced careers were such that those in a position to profit
went along with great enthusiasm. Those who objected, like Born, were summarily
crushed. ...
Of the leaders responsible,
five names come prominently to mind: Alan Greenspan, the longtime head of the
Federal Reserve; Robert Rubin, who served as Treasury secretary in the Clinton
administration; Lawrence Summers, who succeeded him in that capacity; and the
two top Republicans in Congress back in the 1990s dealing with finance, Phil
Gramm and James Leach.
Arrayed most prominently
against them, far, far down the DC power ladder, were two female regulators,
Born and Sheila Bair (an appointee of Bush I and II and retained as FDIC chair
by Obama). They never had a chance, though; they were facing a juggernaut: The
combined power of the Wall Street lobbyists allied with popular President
Clinton, who staked his legacy on reassuring the titans of finance a Democrat
could serve their interests better than any Republican.
Clinton’s role was decisive in
turning Ronald Reagan’s obsession with an unfettered free market into law.
Reagan, that fading actor recast so effectively as great propagandist for the
unregulated market—“get government off our backs” was his patented rallying
cry—was far more successful at deregulating smokestack industries than the
financial markets. It would take a new breed of “triangulating” technocrat
Democrats to really dismantle the carefully built net designed, after the last
Great Depression, to restrain Wall Street from its pattern of periodic
self-immolations. ...
Clinton betrayed the wisdom of
Franklin Delano Roosevelt’s New Deal reforms that capitalism needed to be saved
from its own excess in order to survive, that the free market would remain free
only if it was properly regulated in the public interest. The great and
terrible irony of capitalism is that if left unfettered, it inexorably
engineers its own demise, through either revolution or economic collapse. The
guardians of capitalism’s survival are thus not the self-proclaimed
free-marketers, who, in defiance of the pragmatic Adam Smith himself, want to
chop away at all government restraints on corporate actions, but rather liberals,
at least those in the mode of FDR, who seek to harness its awesome power while
keeping its workings palatable to a civilized and progressive society.
Government regulation of the
market economy arose during the New Deal out of a desire to save capitalism
rather than destroy it. Whether it was child labor in dark coal mines, the
exploitation of racially segregated human beings to pick cotton, or the
unfathomable devastation of the Great Depression, the brutal creativity of the
pure profit motive has always posed a stark challenge to our belief that we are
moral creatures. The modern bureaucratic governments of the developed world
were built, unconsciously, as a bulwark, something big enough to occasionally
stand up to the power of uncontrolled market forces, much as a referee must
show the yellow card to a young headstrong athlete....
