The Financial Crisis of 2008 was probably my generation’s first but it certainly won’t be the last. Ever since the broad trend of financial deregulation that began with the dismantling of the Bretton Woods Agreement, which took the United States off the Gold Standard, bankers tend to blow themselves up every 7-8 or so years. The industry itself only exists today because of what progressive economists like “Dean Baker” have been referring to as the “free insurance policy,” commonly referred to by television pundits as “too big to fail”. Its purpose is to ensure that banks can continue to make ridiculous amounts of profits engaging in risky speculation, knowing full well that their profits will remain privatized and any eventual losses will be socialized.
Most of us were teenagers when the dot-com bubble burst, and were actual children during the savings and loans scandals of the late 1980s, but every time I see Bill Black on alternative media sites talking about how during the SnL crisis they actually managed to put 1000 bankers in jail, I can’t help but feel that something has changed; that even the faintest remnants of a functional regulatory and criminal justice system have been completed eviscerated by lobbyists and bought politicians. Dylan Ratigan expressed this view quite well in a recent, unscripted tirade.
It is no secret that there has always been a reciprocal relationship based on mutual self interest between big business, campaign finance and the passing of favourable legislation. Somehow, this time around the corruption seems worse. The Supreme Court ruling on Citizens United is only the most recent development in this long and disturbing progression.
The reason why, I think, the situation is considerably worse for OUR generation is because the corruption and conflicts of interest and outright fraud are so blatant and are completely out in the open and, besides a handful of people on the fringe, no one seems to care. Worst still, no one has been prosecuted.
To cite an obvious example, un-controversial and recent, we don’t need to look very far.
Goldman Sachs was the first of the large investment firms to accurately price the value of all the CDOs (collateralized debt obligations) and MBS (mortgage backed securities) weighing down their balance sheet. Goldman Sachs’ own internal e-mails and corporate documents, which were subpoenaed by Senator Levin of the Senate Finance Committee, described them as “pieces of crap” and “shitty deals”. Eventually the entire financial industry developed a much more charming term for these exotic bundles of sub-prime mortgage debt; they called them toxic assets.
When Lloyd Blankfien, the CEO of Goldman Sachs, was subpoenaed to appear before Levin’s committee to answer for the charge of defrauding his own clients by selling them products they knew to be worthless, while actively betting against those same bonds through the use of credit default swaps, his responses were priceless. He essentially said the following:
1) There is no conflict of interest in selling our Clients assets we know to be worthless so that we can specifically short those same bonds through Credit Default Swaps
2) This is because there is a magical line that separates our Fiduciary responsibilities to Clients from our Proprietary trading operations.
3) And even if we did defraud our Clients they are “sophisticated investors” who wanted exposure to “risk”
Notice that Lloyd didn’t actually deny any of the charges. His response was much more disturbing; he legitimized the fraud itself by implying that Goldman Sachs was simply “performing the function of a market maker” while maintaining the “trust” among their clients, without which “Goldman could not survive”. It is worth pointing out that these “sophisticated investors” (usually teachers unions, pension funds, 401Ks) only purchased the aforementioned “toxic assets” because rating agencies like Moodys and S&P stamped them with AAA ratings, essentially telling people they were as safe an investment as US Treasury Bonds. And who pays for these ratings? Goldman Sachs. Did the Dodd Frank financial reform act do anything to address the issue of rating agencies? Of course not!
The Dodd/Frank Act was supposedly a response to the most severe economic crisis in modern history. The fact that it didn’t address something as basic as the conflict of interest involving rating agencies being incentivized to inflate bond-ratings for the very investment banks that create the bonds is another example of corruption. Outside of the political or economic sphere, paying someone to knowingly lie about something for profit is fraud and bribery. Within Wall-Street it’s common practice.
The next piece of corruption requires the examination of something that’s not so recent.
I reiterate my earlier point, that people in my generation were too young to remember anything happening in the Clinton Administration beyond the Lewinsky scandal. So how could they know that Clinton’s Treasury Secretary, Robert Rubin, working in close conjunction with Larry Summers and Alan Greenspan at the Fed, pushed the Congress to repeal the Glass Steagall legislation? This was a law which essentially compartmentalized the banking system in an effort to avoid systemic risk after the Great Depression. It separated commercial banks from investment banks. These same three individuals also went to great lengths to block Brooksly Born, a very courageous woman who was then the head of the CFTC (Commodity Futures Trading Commission) from attempting to regulate a growing market in opaque and highly leveraged instruments called ‘derivatives’. Allan Greenspan’s claim to fame, other than an infatuation with Ayn Rand novels, was using his post as Chairman of the Federal Reserve to keep interest rates extremely low for several years after 9/11. This turned out to be a key factor in the development of the housing bubble.
While these three men did not create the financial crises, their actions, namely repealing Glass Steagall, refusing to regulate derivatives, and a prolonged period of low interest rates paved the way for what was to come. And after these fine men left the noble calling of public service and resigned their posts at the end of the Clinton Administration, where did they go in the private sector for their “soft landings”? Summers went on to “consult” for financial firms and give presentations for money. According to his own financial disclosures he has made more than 40 paid appearances to firms like JP Morgan Chase and Goldman Sachs, where he was paid roughly a hundred thousand dollars for each speaking engagement. Robert Rubin went on to become a “consultant” for Citigroup, earning himself $17 million in cash and another $33 million in stock options. Alan Greenspan went on to work as a “consultant” for Deutsche Bank and as a consultant to a hedge fund run by John Paulson; a man most famous for making billions of dollars betting against the collapse of the housing market. So, while Alan Greenspan was issuing public statements apologizing for not seeing the `flaw` in his libertarian fundamentalism about `free markets`, he was working for a man who made his fortune through the very same derivatives that Alan Greenspan fought tirelessly to keep from being regulated during his tenure as Fed Chairman.
These three men were given a nickname by TIME magazine when they were featured on the Cover of the February 15th, 1999 edition; they were called “The Committee to Save the World”.
All of this is relevant for the following reason; these men, who helped destroy the United States economy, are primarily the people Obama selected not only for key posts in his Treasury Department, but also as his economic advisers. In fact, Larry Summers is Obama’s chief economic adviser! Alan Greenspan was a part of Obama’s “transition team” and Robert Rubin remains an economic advisor to Barack Obama. In addition to the “Committee to Save the World” Barack Obama’s cabinet appointments read like a “who’s who” of Wall Street Elite.
Timothy Geithner, the former Chair of the Federal Reserve Bank of New York, is now the Treasury Secretary, and despite Obama’s campaign promise not to hire lobbyists, Timothy Geithner`s Chief of Staff is Mark Patterson, a former lobbyist for Goldman Sachs. And who took Tim’s old job at the New York Fed? Well that would be William. C. Dudley, a former economist from Goldman Sachs.
For a man who is actually on record saying “you can’t expect different results with the same people” Barack Obama has basically assembled the “exact” same people. In fact, the entire time Obama was out on the campaign trail talking about the excesses of Wall Street and the need for comprehensive regulation, his campaign was being financed primarily by the very people he was “denouncing”. If you go to OpenSecrets.org you can see that his primary campaign contributors are lawyers (code for lobbyists), securities and investments firms, commercial banks, and health insurance providers. Is it any surprise that he abandoned the “public option” in favour of a plan that is essentially a federal subsidy to health insurance providers? A lot of the Presidents progressive base were furious with Obama for “giving up” on the public option so quickly, but if you examine his record of bowing down to lobbyists and corporate interests his performance on health care reform was basically consistent with his performance on financial regulation.
Tom Ferguson, a Political Science and Economics Professor from the University of Boston developed a hypothesis called “The Investment Theory of Politics”. The underlining principle is that elections are periods where sections of the business community coalesce and compete to invest in and control the state. The practical application of the theory is its ability to predict policy from looking at campaign contributions.
The fact that the very same criminals who destroyed the economy, financed the campaign of a supposedly liberal democratic President to “fix” the policies of “deregulation” and “change the culture on Wall Street” is in and of itself a form of corruption and fraud. Noam Chomsky, in an interview with Paul Jay of the Real News Network, recently said most polls show “that a majority of Americans believe their government is run by a few special interests groups and does not represent them.” That’s what is so bizarre. The fraud and corruption has become so common-place, no one even expects otherwise at this point.
So, The Committee to Save the World has been plucked out of retirement, and it does not take a genius to see how the world is doing.
Riots in London and Greece. Labour protests in Madison, Wisconsin. Revolutions in Egypt and Tunisia. Uprisings in Syria. Tent Cities in Tel Aviv protesting housing prices. Collapses of the banking system in Iceland and Ireland. The United States’ credit downgrade.
One can draw a fairly clear line from the Financial Meltdown of 2008 and its subsequent response (TARP, Stimulus, FED Bailouts, Quantitative Easing 1 & 2) to increased inflation and rising commodities prices. Also, as countries were forced to bail out their failing banks and investment houses, all of those losses were transferred from the balance sheets of banks to the balance sheets of sovereign nations. All of a sudden people all around the world are on the hook to pay off the gambling losses of their out of control financial institutions. In an attempt to plug this black whole of debt, the White Shoe’s who met in Toronto during the G20 came up with a plan; they called it “austerity”.
If you watch the news, occasionally you will see the ‘Committee to Save the World’ endorse the “austerity” measures, never once will you see any of them apologize. Austerity is funny sort of word, I imagine all the people who lost their jobs and houses and pensions over the last few years would call it something quite different.