Avoid the ruts of the past

Dec 30 2011 - 12:47pm

At Sam Weller's bookstore, in the most low and deeply discounted area, I found a hard cover book for $1: "The Trouble With Money: A Prescription for America's Financial Fever," by William Greider. It was published in 1989 -- over 22 years ago. Yet these words on the back cover might make one think it was just published: "The conservative era has created a ... system that liberates banking and finance for new adventures in risk taking, yet assures the players that if something goes terribly wrong and they sustain great losses, the U.S. government will step in and pick up the tab. The process of picking up the tab is under way -- and on an awesome scale."

Over two decades ago this prescient author grasped all the pernicious trends that culminated in our recent meltdown. For if the 1980s were not a dress rehearsal for what has happened, they set the stage for what happened and fundamentally put the nation on the wrong track with deindustrialization, productive work being devalued and acquisitive success being worshiped, individuals' compensation packages in the hundreds of millions of dollars, government bailouts on an unprecedented scale, growing inequality and class divisions and exploding debt (During the Reagan years, the U.S. was transformed from the world's leading creditor to the world's leading debtor.). To top all this off, these disturbing trends were generally accepted with the faith that they would make the future better.

It was widely assumed government and regulation were the problem, so finance was quickly liberated. In this permissive culture, Wall Street, which played a role in triggering the Great Depression in 1929, was given a much more predominant role in the economy than it had since the 1920s. The dominant voices of the financial sector got to call the shots of economic policy. There had been prohibitions of usury since Old Testament times but now "Usury was decriminalized, not unlike gambling and certain once-forbidden forms of sexual behavior." Financial regulations were removed and in one decade the volume of Wall Street trading increased thirty fold (not including the swollen transactions of foreign exchange) as many found a narcotic attraction to trading. Of course production did not grow commensurate with finance. It did not even come close. But it was foolishly assumed that a very rapidly growing financial sector could levitate over a much slower growing real productive economy and indefinitely extract profits from it.

In a chapter entitled " Playing with House Money," Greider details how Washington became the "powerful fairy godmother" of the North Carolina National Bank and allowed it to more than double in size in the last weekend of July 1988. That bank acquired $20 billion of bank assists with a mere $210 million of up-front money. It immediately jumped from being the 18th largest bank to becoming the eighth.

It was in the 1980s that the doctrine of "too big to fail" was greatly expanded to not only include the top dozen financial institutions, but the top 50 or 100 banks in the country. The "too big to fail" doctrine was born in extreme circumstances but Greider correctly predicted it will endure as the rule because extreme circumstances will also endure.

Securitization occurred when lenders bundled together thousands of home mortgages into one bond. By 1989 mortgage-backed securities "spawned vast markets that barely existed a decade ago." The enormous problems these mortgage-backed securities create was recognized by a former chief economist at Solomon Brothers, Henry Kaufman: the relationship between "the creditor and debtor is loosened because creditors are not permanent holders of the debt ... In a securitized world, the Fed will inherit the problem of the troublesome debtor." Sound familiar?

In a 1989 congressional hearing, Washington attorney Thomas H. Stanton warned about a potential explosion of Fannie Mae (which then had only $2.6 billion in shareholder equity behind $196.5 billion in combined assets) and Freddie Mac (which then had only $1.7 billion supporting $278 billion). Stanton made a prophetic utterance: "Heads, the corporation and its shareholders win. Tails, the U.S. taxpayer pays for big mistakes."

"Moral hazards" occur when there is an economic incentive to seek greater returns by taking on extraordinary risks because someone else will be responsible for the losses. They proliferated during the era because an ever narrowing individualism was coupled with regulators who were permissive on a reckless scale and fatalistic about the consequences.

Clearly, the deregulation did not impose -- as conservatives had promised- discipline on market participants.

As these polices produced regional crisis with deindustrialization, growing inequality, and falling incomes for many, blame was invariably laid on victims to absolve the conservative policies and system.

Wall Street deceived the public in the 1980s and the public paid hundreds of billions toward bailouts. In the last two d ecades, Wall Street sold the public on more deregulation of finance and it will again cost the public hundreds of billions in bailouts. Now Wall Street, Republicans, and the Tea Party want to return to the ruts of the past and are calling for more deregulation and 1980s approaches. Will the public buy the Brooklyn Bridge for a third time?

How many times do we have to run the conservative experiment? Why can't the public see that the prognostications that Greider and others had decades ago have been brilliantly vindicated?

Jones lives in West Haven.

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