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Tue 1 Apr, 2008 08:37 am
I agree with Kevin Phillips. I've long thought the financial sector of the U.S. economy will eventually destory the middle and lower classes unless they are brought under control. The U.S. cannot survive based on greed. We can thank Alan Greenspan for imposing his Ayn Rand beliefs on our country to our sorrow.---BBB
The Destructive Rise of Big Finance
Posted March 31, 2008 | 07:48 PM (EST)
by Kevin Phillips
Economic, financial and regulatory issues should dominate politics and government in the United States for the next two or three years, which is important enough. National discourse may also have a new and deserving bogeyman. Franklin D. Roosevelt had Big Business, Ronald Reagan had Big Labor, and my guess is that the new president inaugurated next January will have Big Finance.
True, finance has been whupped by presidents before. Thomas Jefferson and Andrew Jackson, for example. But that was in the quill-pen era when the financial sector was a pup. Today's financial services sector, by contrast, is a grasping, gargantuan combination of banks, stockbrokers, insurancemen, loan sharks, credit-card issuers, hedge fund speculators, securitization mavens and mortgage operators. Over the last five years, financial services has reached a swollen 20-21% of U.S. GDP -- the largest sector of the private economy.
Manufacturing led financial services by 2:1 back in the 1970s, but by 2006 beaten goods production had shrunk to just 12% of GDP.
Do most Americans understand this? Of course not. Newspaper front pages have shunned any discussion; 60 Minutes has not even spared the transformation sixty seconds, despite its vast implications. This upheaval is probably "the greatest story never told" about the two decades between, say, 1986 and 2006.
Nor was it an economic accident. Computerization was a prequisite, as was the rise of financial mathematics. However, I would say that the two most important underpinnings of financialization lay in the rise of public and private debt as a mainstay of American culture and economics and the perpetual liquidity and bail-out support of the Federal Reserve Board under Alan Greenspan. During Greenspan's 1987-2005 tenure, the sum of public and private debt in the United States quadrupled from just over $10 trillion to $43 trillion. Finance became the industry that was not allowed to fail but was permitted to enlarge and metastasize its behavior almost at will. Regulation was minimal. Favoritism was omnipresent.
The result, alas, has been all over recent headlines. America's biggest ever housing bubble, with 57 varieties of exotic mortgages and home prices now plummeting at rates unseen since the 1930s. The United States turned Credit Card Nation, with a citzenry in thrall to plastic, 20% interest rates and late fees for just about everything. Huge banks like Citigroup feel no shame in paying billion-dollar fines for colluding with Enron's tax and accounting deceits. And since mid-2007, national and world credit markets have been panicked and paralyzed by hitherto obscure instruments -- the stand-outs are collateralized debt obligations (CDOs) -- that not even their designers and packagers can explain.
Adolescent versions of Frankenstein finance became a crash and a disaster for Americans in 1929 when the industry was new and represented only 10-15% of the economic weight of American manufacturing. Now, by contrast, the unraveling of a second financial sector-turned casino involves literally the biggest force in the American economy. Who knows how much of this hubris and malfeasance is going to unwind unpleasantly or how long that will take?
In fact, phony Washington statistics and warped market measurements make it doubly hard to tell. The federal Consumer Price Index is already regarded by many Americans as a con job, and the press periodically quotes investors who state their belief that current U.S. inflation is really 6 to 9 percent a year, not the 2-4 percent the government alleges. I agree. On top of which, because the value of the dollar has dropped so far, the Dow Jones Industrial Average at the end of March was not really 12,200, a number barely up from its 11,700 peak in 2000. If you measure the Dow in Swiss francs or euros, two strong currencies, it has already lost some forty percent of its 2000 value. Too many Americans live in a dream-world of economic misinformation.
I began writing about these matters with a 1990 book entitled The Politics of Rich and Poor, and in several other volumes since then. Today, the economic negligence of Washington and Wall Street, more than two decades in the making, has led to a multi-dimensional crisis in which this country faces an unprecedented convergence of problems: unprecedented debt, tumbling home prices, reckless money supply expansion, growing inflation, insufficient and expensive oil, and an eroding dollar. Sadly, there may no longer be a plausible way out.
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Kevin Phillips' new book, Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, is being published in April by Viking.
Do most Americans understand this? Of course not.
Thanks for your wonderful critical human views.
Bailing Out the Reaganites
There are many reasons to hate the saint myth of Ronald Reagan, but this is the most important one that has led to the current financial crisis and the damage to the Middle and Lower classes.---BBB
Bailing Out the Reaganites
By Harold Meyerson
Washington Post
Wednesday, April 2, 2008; Page A19
Would that the Republican contest for the presidential nomination were still going on!
The one point that all the candidates stressed, you will recall, was their fealty to Ronald Reagan's vision. Imagine, then, a debate in which each tried to square his allegiance to Reagan's doctrine of laissez faire with the actions of the Bush administration and the Federal Reserve to bail out Bear Stearns and the entire investment banking sector. The contortions would have been mind-boggling.
Reagan's mission in domestic affairs, we should recall, was to tear down government so that a more laissez faire economy could supplant the economic order built by the New Deal. Today, Republicans in general and John McCain in particular are paying the price for Reagan's success. A largely unregulated financial sector now dominates our economy, while manufacturing, once the keystone of American economic might, has dwindled to distinctly secondary status. As unregulated financial sectors are wont to do, Wall Street embarked on an orgy of speculative investment and debt accumulation, and now its bad investments and overwhelming debt threaten to pull down the entire economy.
American conservatism was in trouble before Wall Street's convulsions. The Bush administration's failure to get a Republican Congress to join its efforts to privatize Social Security during the 2005-06 congressional session revealed the limits of conservatism's push to dismantle government protections. At the very moment employer-provided benefits and pensions were being ratcheted down, the last thing the American people clamored for was an assault on Social Security, too.
And yet, in every Republican debate in this presidential cycle, each candidate tried to claim Reagan's mantle. Now, the task of squaring the Reaganite worldview with the collapse of the Reaganite world under the weight of its own doctrines has fallen squarely on McCain and those Bush administration officials charged with averting an economic catastrophe. It's been no easy chore. Until recently, McCain's economic message consisted chiefly of abolishing congressional earmarks in appropriations bills -- a classic Reaganite proposal that would have no effect on our economic situation. (Earmarks amount to a little more than one-tenth of 1 percent of gross domestic product.)
Forced to confront the prospect of a massive wave of foreclosures and some bank failures that could imperil the whole financial system, the Annapolis grad is plainly at sea. In his speech on the economy last week, he promised to oppose legislation that would bail out home buyers who shouldn't have taken out the loans that the mortgage industry was throwing at them. The next day he semi-corrected himself, saying he was open to proposals that would help "deserving homeowners."
McCain's conflicts are intensified by those of his campaign's general co-chairman and domestic policy adviser, former Texas senator Phil Gramm. The Politico's Lisa Lerer reports that not only did Gramm author the 1999 legislation that repealed Glass-Steagall, the New Deal law restricting the speculative activities of banks, but after Gramm left the Senate, he lobbied Congress on behalf of the Swiss bank UBS when the banking lobby wanted Congress to overturn state laws restricting predatory lending and the issuance of mortgages to prospective home owners who could not afford them. (UBS announced yesterday that it had written down $37 billion in bad mortgage loans over the past six months.) Gramm, Lerer reports, is often a surrogate for McCain in meetings on the economy.
It is not obvious, then, why anyone would turn to McCain's economic team to rein in the excesses of our financial sector. Nor would anyone necessarily turn to former Goldman Sachs co-chairman Henry Paulson, but for the fact that he is Treasury secretary. Paulson's ambivalence toward regulation is amply apparent in his proposals to restructure the government agencies that monitor American finance. If enacted, Paulson's program actually would lead to less government oversight of Wall Street.
In their unwillingness to do what it takes to save the economy, McCain, Paulson & Co. are treading a familiar path. From 1929 through 1932, Andrew Mellon, Herbert Hoover's Treasury secretary and owner of one of America's largest banks, saw no role for the government in helping the economy other than to encourage companies to lay off their employees.
The architects, owners and adherents of a laissez faire economic order have never transformed themselves into economic saviors when the economy they built collapsed. Successfully regulating an economy gone wild has invariably fallen to political leaders who actually believed in regulation.
This is no moment for political leaders who still swear by Ronald Reagan -- John McCain foremost among them. It makes no more sense to put them atop the economy than it does to take a group of pacifists and commission them generals.
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