Doug Dowd, 89, is a widely respected political economist, economic historian and lefty political figure from way back. Now semi-retired and living in Bologna, he’s the father of Jeff “the Dude” Dowd, the producer’s rep and Hollywood mover and shaker. Jeff recently sent me a letter from his dad that does a nice, clean job of explaining the financial pickle we’re now in. It’s windy but Howard Zinn-like and easy to follow.
If you’d rather not read it and would prefer a summary, it basically explains how the seeds of today’s calamity have been germinating in his country’s financial system since the early days of the Ronald Reagan presidency. Since that time the spirit of Gordon Gekko has been controlling more and more of the government — a government bought and run by elite greedhead serpents. Deregulatory “anything goes” Bush-Cheney financial policies sealed the deal, and here we are today and dreading tomorrow. Anyway, here’s Mr. Dowd’s rundown, which he simply calls “Letter from Bologna.” Forget the quote marks — it begins here:
With the U.S. and global financial systems shaking and likely to get much worse, I’m going to do what I can to explain the why’s and wherefores. As usual, the information will be anything but cheerful. Nor will it be brief, but it can’t be very short if it is to be at all meaningful.
First There Was 1929
To understand today’s financial crisis and dangers, it is useful — even necessary — to go back to its most relevant predecessor; namely, the U.S. crash of 1929. There are many differences between that period and today. I will discuss some of the most relevant. In doing so, it will become clear that whatever caused the 1929 crash, what is going on now is worse — both in its causes and the probable depth and breadth of its likely consequences.
Scariest of all is that since the 1970s whatever we might or should have learned from 1929 has been buried and forgotten, which is particularly troublesome given that what’s now underway carries with it deeper dangers than the disastrous ’29 collapse did.
The causes of the 1929 crash were several, each feeding and fed by the others. Now some history.
From the mid-19th century until World War I, Britain “ruled the waves,” but there was nothing like the functioning world economy over which the USA ruled after the 1950s. Britain was No. 1, but could not really rule: All others were in competition and conflict with it and with each other for colonies — in ways that created World War I.
After the war the Europeans were trying to recover economically and socially. Then they were confronting revolution or counter-revolution, and the 1930s depression. And then World War II.
The USA, on the other hand, was different. It was strengthened, not weakened, by World War I and had no political upheavals afterwards. (It did so in part through a manufactured “red scare” and brutal suppression of its militants, in particular the crushing of the I.W.W.) Though, like the rest, it did experience the Depression, because of World War II, the USA would become the strongest economy ever — in a world in which all others had been flattened.
From 1914 on, the USA was much strengthened economically from war production (as always). That helped the 1920s to become what was called “the prosperity decade.” Along with that, not only had the U.S. economy’s strength risen at home and abroad, so also had the political power and prestige of business. Big firms and their bought-and-paid-for politicians could do anything they wished and make fortunes as they did so — especially and most rapidly in (guess what?) speculation.
Wall Street speculation multiplied insanely, and participants came to include not only those with the highest incomes, but also those of the so-called “middle class.” This was a game almost anyone could play, one with no regulations and no limits. Wall Street had become a gambling casino.
Thus it was that in October 1929, the madness of speculation having gone beyond all limits, “Black Thursday” occurred. What needs understanding for present purposes is that as 1929 became the most ecstatic year for the financial sector, there was also a lot of trouble brewing in the background:
* High and rising unemployment
* Business failures
* Desperate farmers
* Increasing numbers of street beggars
* Using today’s understated definition of poverty, half of the people in the country living (that is, subsisting) in poverty.
But for those doing the speculating, the 1920s were rollicking good times; for them it was “the jazz age.” Wall Street had no interest in or care for what was going happening on Main Street (the title of the 1920s novel of Sinclair Lewis).
Post-Crash Depression and War
From Black Thursday on, month after month the stock market went down, popped up for a day or two, went down again, popped up a bit. That went on for almost 4 years before the market bottomed out and the crashing ceased.
During those years the ongoing posture of those in power (or at least those not yet among the unemployed masses) was utter pie-in-the-sky nonsense. Their faith-based nostrum (marketed to the credulous and the media) was “Prosperity is just around the corner.” Meanwhile, on the streets desperate people were holding out their shivering hands, begging, “Brother, can you spare a dime?”
Personal memory: I remember walking down Market Street in San Francisco when, passing one of these beggars I asked my soon-to-be-divorced father to give me a dime to give the guy, and he said “Douglas, you have to understand these bums are just lazy.”
Recovery was slow, tremulous, uncertain. The devastated U.S. economy need a bigger push. Full employment in the USA was not reached until 1942 — a whole year after we had entered World War II, during which (1941-1946) 16.1 million got “jobs” in the military. Because of the war, the Depression in the USA was finally over. But painful memories remained and reverberation from the shocks of the big crash and the troubles of the depression changed the U.S. political scene.
From the early 1930s until the end of the 1960s, the U.S. government passed a group of (real) reforms and introduced many regulations that, among other things, concerned the financial sector. Their aim was to make it difficult or impossible for Wall Street to be once again a gambling casino. And for a while, it wasn’t. And yet nowadays, Wall Street makes Las Vegas look like a cathedral.
As the decades from the 1930s to the 1960s unrolled and the “wisdom” of the 1920s business community was finally understood as dangerously boyish greed, this is what the leading economist of the 1930s (J. M. Keynes of Britain) had to say:
“Speculators may do no harm as bubbles on a steady stream of enterprise, but the position is serious when enterprise becomes the bubble on a whirlpool of speculation.” (General Theory of Employment, Interest and Money [1936])
Compared with now, the whirlpool Keynes mocked was that of a flushing toilet. Since the 80s and 90s the financial whirlpool has been more like those made by Niagara Falls.
How Power Has Changed
What must be understood about what’s happening now is, first and foremost, how the structure of economic and political power has been transformed since the 1920s. Let me count the ways.
1. The Promise of What Might Have Been
As the 1930s depression began, deepened, and continued, a sufficient part of the U.S. public finally began to realized how greedy — and dangerously stupid — their rulers had been. By 1934-35 that realization became politicized sufficiently enough to cause President Roosevelt (who had been a conservative when elected in 1933) to surround himself with “reformers” (one of whom was his very liberal wife Eleanor).
As the ’30s went on and he remained in office, Roosevelt had shed his conservatism — so much so that after his 1944 re-election he gave a State of the Union address in which he dared to propose something that no U.S. president since has had the temerity even to whisper. It was a “second Bill of Rights.” Here are some of his words:
“In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all — regardless of station, race, or creed.
“Among these are (a) The right to a useful and remunerative job in the industries or shops or farms or mines of the nation; *b) The right to earn enough to provide adequate food and clothing and recreation; (c) “The right of every farmer to raise and sell his products at a return which will give him and his family a decent living; (d) “The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad; (e) “The right of every family to a decent home; (f) “The right to adequate medical care and the opportunity to achieve and enjoy good health; (g) “The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment; and (h) “the right to a good education.
“All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.”
Roosevelt died a year later, but the reforms continued — at least until reversed from the ’70s on. As of 2008, those “basic needs” are being been met for only one-third of the U.S. population.
2. Real Change for a Change (for a while)
What was “reformed” from 1935 through the 1960s? Who guided policy-making and for whom? The USA did not become socialist, but for many years the voice of business was at least somewhat muffled, and the needs and possibilities of the society were dealt with, if only moderately. And for at least a decade or so, those who resisted those needed changes had a difficult time being elected or staying in office.
3. Big Business, Big Profits, But Social Needs Met
The USA was brought into World War II by the Japanese attack on Pearl Harbor (itself a diversion for the bigger and more devastating attack on the Philippines 10 hours later). Now the U.S. government was forced to meet some social needs that had continued to be ignored; if only (and usually it was only) to have the war conducted effectively. The usual resistance of Big Business to spending money for human needs was much softened by the fact that war production brought them monumental prosperity — 100 corporations received 2/3 of all military orders and the associated profits.
4. Burgeoning Worker Strength
Among other changes was that which made it easier for workers to form unions, for blacks and women to have jobs previously denied them, and (inter alia) for practices such as subsidized health care to begin..
5. Everybody Ahead, Supportive Politicians
After the war the average family in the USA was much better off than ever before, aided and abetted by supportive legislators (whom they had elected).
6. Power Reshaped by Consumerism
Now that everybody was better off, the average family could buy and use more commodities and services. And it did — enchanted by the better life through purchasing the right products, as promised by advertising. In that consumerism was becoming almost a religion, always less attention was paid to politics by John Q. Public and always more to buying and borrowing.
Consequently, it became increasingly easy for big business to recoup its power over government and use it (and its resources) as it wished. The public was out of the loop, but merry and content — and ever increasingly so — because it was shopping.
7. The Owner of Us All: Big Business
In consequence, the onslaught of consumerism meant that from the 1970s on (and always more so), local, state, and national politics were — and are — “owned” by business.
Finance Eats the Real Economy
There is much more to say regarding those matters, but not in this presumably “short” essay. I now turn to the most relevant aspects of the post-1970s transformation; namely what occurred in the role and nature of finance.
Simply put, what occurred is that the financial sector came to dominate not only the entire economy but, also, an always weaker democracy (with cooperation, for various reasons, from Evangelical Christians [one of whom is U.S. President Bush]).
To the meanings of the above transformation of power and today’s financial processes I now (finally) turn. It is appropriate to begin with the connection between the behavior and processes of finance today and the virtual abolition of earlier regulations — and that, my friends, requires another bit of history.
I begin with a quotation from one of the more serious students of this problem, Kevin Phillips. It is relevant to note that Phillips is a long-time, self-styled “conservative Republican” who, up to the ’80s, was an active and important part of their politics. However, as the ’80s ended, he realized that his party, rather than “conserving” capitalism and democracy, was destroying it.
The book from which the following is quoted was published in 1994. Since then, as he feared, the processes he deplored have sped up and worsened. Phillips points out that as the ’70s began, the financial sector was subordinate to Congress and the White House and their total financial trades over an entire year was a dollar amount less than GDP.
By the 1990s, however, through a a 24-hour cascade of electronic hedging and speculation, its annual volume was 30 or 40 times greater than the dollar amount of “the real economy.” Each month several dozen huge U.S. financial firms and exchanges electronically trade a sum in currencies, futures, derivative instruments, stocks and bonds that exceed the entire gross national product of the U.S.A. (Arrogant Capital (1994).
One Kind of Derivative
It is worth noting that one of the “derivative instruments” and are the hedge funds that became infamous in the 1990s. They are extremely technical and complicated. Their “fathers” are two Nobel prize-winning economists from the University of Chicago (the “home” of conservative economics).
To become a “member” of these instruments in the ’90s, one had to have access to at least $2 million. It was the doings of those fancy instruments (LTCM) which lost billions in the 1998. Because that misadventure threatened to take many giant companies (and perhaps the whole economy down with them, the Federal Reserve (run by Alan Greenspan, a leading conservative and devoted follower of the right-wing mystic Ayn Rand) came to the rescue and bailed them out (paid for by our taxes).
In a sane society that would have been seen as a warning stop those fancy financial games. Fuhgeddaboutit: Now almost anyone can get into one of the thousands of hedge funds.
How to Succeed Without Trying
Consider this headline: “Subprime pariahs become stars. Huge losses by top executives get written off as ‘bad luck.'” The story (IHT 2008-01-28) is about two how two guys at the top of Merrill Lynch and Citigroup, who lost $34 billion for their companies in subprime-related securities, “are well on their way to getting similar jobs with…Bear Stearns (also at the top of finance).”
How in the world can you screw up to the tune of $34 billion, but still manage to stay on top? Because, in the words of one finance professor: “It’s always an assumption that it’s not individuals that lose the money, it’s the system.” I guess so: Same day, same article: “The most recent example of failure leading to prosperity is John Meriwether. Ousted from Salomon Bros. in 1991 for his role in a bond trading scandal, he became a co-founder of LTCM, the hedge fund that nearly collapsed in 1998, rattling markets worldwide. He now heads another fund, JWM Partners, with assets of $3 billion.” Hold on to your hats, there’s something “just around the corner” — and it’s not prosperity.
The History of Housing Loans
Today’s always deepening and spreading financial crisis first gained attention regarding the “subprime” housing collapse that became apparent in 2006. However, warning signals had already begun to sound as early as the 1980s, with what came to be called the “S&L Scandals.” Because their origins, nature, and its governmental treatment foretold what is now happening on a larger scale today, they deserves a look. The S&L debacle was the first of a series of steps in which sensible financial rules were replaced by those opening the financial doors to gamblers and criminals.
“S&Ls” stands for “savings and loans associations.” When they were “born” in the 1930s, they were meant to be neighborhood banks for middle income working-class families’ savings, where such families could borrow to make down-payments on their house mortgages (with ceilings on interest rates).
The S&Ls were tightly regulated, and their earnings were modest. With the help of the buoyant post-WWII economy, the result hoped for was attained: By 1970, two-thirds of all U.S. families (mine included), had financed their homes through their neighborhood S&L.
Enter the 1980s, stage far right, President Ronald Reagan — star of stage, screen, and reaction. One of his first “triumphs” was to preside over the de-regulation of the S&L’s. When he signed the bill in October 1982, he cheerfully chirped, “All in all, I think we’ve hit the jackpot.”
Reagan’s deregulation served as an invitation to reckless financial practices for households and all financial institutions. The ownership and control of the S&Ls (and much else) were swiftly taken over by lowlife gangsters, rogue criminals, opportunistic fools, and just plain greedy financiers — all getting their capital not from the neighborhood folks, but every which way, while always raising interest rates.
Here’s Phillips again:
“The national power structure bailed out the shaky financial sector, and on a large enough scale that in the end the banks and S&Ls rescued through federal payout represented a higher share of the nation’s deposits than…those forced to close their doors in economic hurricane of the late 1920s and early 1930s….and the financial economy continued to eat the real economy.” (ibid.)
Emergence of the Modern Global Economy
Reminder (to myself and you): We’re trying to get a perspective on what is going on in finance now. To do so without making this monograph into a book, I will skip from the 1970s to the present.
What the skip elides over without discussion is the so-called “globalization” that gained strength in the 1980s and now dominates all economies.
Globalization has had many consequences; important among them have been the “de-industrialization” and the “financialization” of the U.S. economy (and others). But is there a problem?
Let’s look at how the process works. Since the ’80s the de-industrialization transforms what was an essentially industrial (and high-wage) society to one that (by definition) now produces less and less of the industrial commodities it uses.
In doing so, its relatively high-pay industrial labor force is transformed into a mostly low-pay service force that, naturally, seeks to go on buying as much as (or more) than before, but that must (and does) borrow to do so.
This activity tilts the balance of the economic structure toward a) finance and b) always greater indebtedness on the part of both households and the nation; therefore, increasingly, the country becomes financialized and (as now) also increasingly a creature of speculators.
Let me summarize the steps:
1. At the start: a high-wage industrial society producing industrial commodities.
2. Industry leaves: Production diminishes.
3. The labor force (necessarily) shifts to low-pay service jobs.
4. It’s hard to cut back the standard of living: So the labor force borrows more and more. (Plus, there are, of course, the manifold inducements of advertising.)
5. The borrowing pushing the economic structure toward finance.
6. Household and national debts pile up.
7. Concomitantly, the country becomes more and more financialized.
8. Speculation and speculators start to run rampant.
It bears emphasizing and repeating a couple of points:
1. Today’s average U.S. household starts each month owing more than it earns, and is regularly encouraged to keep spending via additional credit cards.
2. The USA’s always rising annual trade deficit (now just a bit under one trillion dollars, puts the U.S. economy (and therefore the world economy) at the mercy of international speculation.
That said, there are other things to say that follow “as the night follows the day.” Does that include more wars? It needn’t — but as long as Bush-Cheney are in the White House, who knows? With what is perhaps unreasonable optimism, let’s assume that, although the war in Iraq may be endless,there will not be an additional war (with, e.g., Iran). They may be restrained by lack of troops, if nothing else. You can’t use all mercenaries!)
In our capitalist world, “as the economy goes, so goes the society” has long been true; now, instead, it has become “as the financial sectors’ speculators go, so goes the economy and the society.”
So how does the financial sector “go” — what is its engine? In the modern world there have been two dominating powers: Britain in the 19th century, the USA in the 20th. When Britain was most powerful it was dominated by industry, until the late 19th century. Then, as that century drew to a close, Britain’s industry began its fall behind the USA and Germany; and British, finance began its rule. Britain became “the world’s banker” (especially for Germany and the USA).
That set of changes, begun in the 1870s-1880s, endured up to World War I; although the UK’s industry was falling behind (as ours does now), it continued to be owed by all. But there is a huge difference: the USA owes almost all, especially to — of all places — capitalist-Communist China. (And holds over a trillion dollars of our private and governmental securities. [Does that make you shiver?])
The USA ruled the world industrially and financially from 1945 until the 1980s. But from then on, we ceased being the creditor nation for the entire world, and began to approach what we are now: the most indebted nation in all of history. To which it is vital to add that almost all of the world’s economies depend critically upon the USA’s always buying more and increasing indebtedness to others for the others’ economic well-being.
You don’t have to be an economist (indeed, it is my view it is better if you are not, considering the unrealism of economics) to grasp that this is a very precarious situation. Why precarious? Because the consumeristic U.S. must continue to buy more always more of the lower-priced commodities produced abroad, and it is vital for the producers’ economies to sell always more to us. But globalization has meant that the income distribution of the USA for the past 30 years has been in a downward spiral for most, while at the same time, the upper 10 percent takes in an always greater part of total income. Middle incomes slowly but steadily shrink and the bottom one-third descend into poverty.
That means more and more borrowing on credit for those who can get it, and that means almost everyone — including the “sub-primers” (who are already almost poor even before their probable default). What people now borrow for in the USA is simple: almost everything. Except for purchasing houses, the almighty credit card is ubiquitous, omnipresent.
To this simmering stew of borrowing, it is important to add the sub-prime loans, whose terms include delayed payments of both interest and principal, and whose buyers include all too many who “bought” homes for upward mobility — so they could become members of the now-collapsed housing boom.
So that’s how it works, but what’s the problem? If you read or watch the news, you will know that there is a looming giant problem. But what gets the most attention is the subprime housing bust of the boom just noted. But that bust is only one element of a large group [of players] whose fates are interconnected. They shouldn’t be, and regulations put in effect from the ’30s on said they couldn’t be, but as was discussed earlier, since the 1970s, they have been.
Financial Matters Under the Microscope
So now an even closer look at the financial sector. How the financial sector has gone and continues to go is toward becoming a fancy name for the speculative sector of the economy. Much of that speculation has a respectable face — that is, that portion of speculation that has been made effectively necessary by globalization.
The big companies whose production and sales are both “internationalized” must deal every day with foreign currencies in what amounts to a speculative manner, even though their intent is not gambling: They are buying and selling this and that every day. They can win or they can lose — big or small — depending upon how well or badly their guesses turn out about the relationships between this or that currency. And the amounts involved are always in a process of rapid change — upward.
For example: In 1986 I was looking over the annual report of the Bank of International Settlements (the clearing house for all currency transactions) and found that in the average daily foreign currency transactions for that year had been $180 billion, and that 10 percent of that was seen as speculative. Ten years later, the daily level was $800 billion; two years ago, the figure was $1.5 trillion daily, and well over half of that was for speculation. Today? Don’t ask.
Getting Regulation Out of the Way
A good part of that big jump in foreign currency transactions has a reasonable base in a globalized economy, just as some speculation had in an old-fashioned capitalist economy. But just as all that gambling got out of hand in the 1920s, so did it once more from the ’70s on. And so it would in any period of capitalism, for capitalism depends upon maximization of profits, whether they are from production or speculation. Thus, in a socioeconomic system that depends for its health on this maximizing (which melts easily into “greed”) it is also essential for its health to have at least some rules. As it clear (and as noted earlier), the rules enacted from the ’30s on have now been abandoned.
Five Regulatory Failures
“Abandoned” is too polite a term for what happened from the ’70s on in the USA. As we now examine the systematic and deliberate abandonment of cautious regulations, keep in mind that what has been canceled, crushed, or systematically ignored was the result of well-organized political pressures from the financial sector to free up the economy and the society for “anything goes” — yes, anything at all, so long as it is being done in the name of “good business.”
In what follows directly below concerning five deliberate regulatory failures I have depended upon the excellent work of Robert Weissman, editor of Multinational Monitor, in Counterpunch:
As you read about them, keep in mind that all of these “failures” were triumphs for the giant companies and their lobbyists who produced them. (All in all, they hit the jackpot, at least for a while.)
1. Failure to control or manage the U.S. foreign trade deficit (now increasing at the annual rate of $1 trillion).
The so-called “housing bubble” (not to mention the great increase in leveraged buyouts of publicly traded companies) was made possible (and in the USA, inevitable) by cheap and easy credit, assisted by an enormous influx of capital from China. The capital surplus in China was the mirror image of the trade deficit here in the USA: U.S. companies were sending lots of dollars to China in exchange for the cheap stuff sold to U.S. consumers (many of whom lost their production jobs as a result). The USA now in debt to China to the tune of $1.3 trillion (and also in debt to Japan for $1 trillion).
2. Failure to intervene to “pop” the housing bubble
The head of the Federal Reserve System (though self-styled “conservative”) declined to recognize the existence of the bubble,” let alone to try to control it with interest rates.
3. Failure to use existing or create new forms of financial regulation and to check “financial innovation.”
Time was when lending institutions held on to their loans. When loans were made, repackaged, and sold off without oversight, the race was on. The tease to borrowers was “no down payment and no interest payments for months” (which opened the gates to subprime mortgages). Precarious experiments proliferated, such as “collateralized debt obligations” (CDO’s, which were repackaged loans), plus other well-hidden, mysterious (to one and all) ways of speculation. No one — even and especially the supposedly shrewd investors in CDO’s — bothered to determine the quality of the loans involved in the packages (which was often very low) or what would happen to their value if the red-hot market cooled down.
4. The utter failure to self-regulate.
Bankers (and their like) have traditionally been seen as “conservative,” with rating agencies to see to it that they deserved that title. Agencies such as Standard & Poor’s and Moody’s were to give investors guidance concerning such presumably important matters as — risk. In recent years they failed utterly to do so, at least in part because they wished to maintain good relations with the their customers (the very investment banks issuing CDOs).
5. Failure to control predatory lenders and their lending practices.
“Predatory lenders” is a polite term for thieves. In recent years, failing regulation, they were free to sing to borrowers (poor and otherwise) that the peculiar terms of their loans didn’t matter (no matter how “innovative” [v.s. failure No. 3], so long as “the value of your purchased house is rising.” Well, it did so long as there were always more innocents and not-so-innocents at the other end. For more than a year now, there haven’t been more takers.
Predatory lending is very similar to multi-level marketing, chain letters, and Ponzi and matrix schemes. These are all scams, because the only way to come out ahead is to get in at the absolute beginning — and then find other pigeons (and get out while the getting is good). If this process sounds familiar, it should. It’s a kind of “crack-the-whip” — ever play that game? If not, here’s how:
The Sum of the Five
Altogether, the procedures just described made the ongoing rash of foreclosures unavoidable. Moreover, consequences of the “mortgage meltdown” (already taking over two million recent homebuyers into desperation) is just the beginning of a much more dangerous set of processes. The already-acknowledged credit crunch has also begun to endanger the processes of international finance, because virtually all banks, all large corporations, all financial institutions are involved guessing wildly about what’s next; as well they might. (And they have forgotten just why it was that they got the government to get rid of all regulations.)
All of this has taken place side by side in our deeply consumerisitic and debt-laden nation — in which, to repeat, U.S. households are indebted for amounts 103 percent of their incomes. And yet they are allowed and encouraged to continue to do what they are doing.
Since at least the 1960s, the U.S. economy’s prosperity has increasingly required consumerism; that is, that people become habituated (as Paul Baran put it, in the ’60s) to “want what they don’t need and not to want what they do.” To do that, the people of the USA (and the USA as a nation) have gone always more deeply into debt.
The housing bubble and other matters noted above are turning out to have been only the first and most publicized processes of what will be a full-blown financial disaster for the USA. This looming national catastrophe is also likely to be first big step toward a globalized economic collapse — 1929 all over again, but with a vengeance.
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