The uproar about bonuses awarded to AIG employees would be hilarious were it not so troubling and pathetic.\u00a0 It is almost emblematic of the refusal of virtually all, government, politicians, pundits, citizens, all, to see what is staring them in the face.<\/p>\n
The solution to all this, at least for the short run (the next few years or so) is simple.\u00a0\u00a0 A long-term solution is far more difficult. If AIG, GM, CitiGroup, Goldman Sachs, etc.<\/em> are too big to fail, then make them smaller and <\/strong>limit their power and authority<\/strong>.\u00a0 Once upon a time, there was legislative protection against the sort of predatory practices that led to the current financial woes.\u00a0 Way back in 1933 Congress passed the Glass-Steagall Act, forbidding commercial banks from engaging in investment bank activities.\u00a0 In the years leading up to the Crash of ’29 commercial banks, legally, were very heavily involved in taking equity positions in the stock market.\u00a0 Not surprisingly, many placed a large share of the blame for the crash on this sort of pursuit.\u00a0 Glass-Steagall was intended to put an end to this practice.<\/p>\n Before the Great Depression commercial banks engaged in highly speculative investments of their assets (that is, their shareholders assets); they purchased various assets and then sold them to unsuspecting individuals.\u00a0 Worse, they made loans to the companies they owned or partly owned, often shaky loans at that.\u00a0 In a total conflict of interest, they then sold stock in those companies, reaping huge profits.\u00a0 Minus the conflicts of interest, at least in theory, this stuff is normally the province of investment banks.\u00a0 Sound familiar yet?\u00a0 It should.<\/p>\n Glass-Steagall was supposed to formally and legally separate commercial and investment banks.\u00a0 Another innovation of the Act was to allow insurance of bank deposits for the first time, at least in the U.S.A.\u00a0 The Act created the Federal Deposit Insurance Corporation for this purpose.\u00a0 With some exceptions, the Act did create such a separation, at least formally.\u00a0 The Federal Reserve Board was the supposed regulatory body which would enforce Glass-Steagall.<\/p>\n The Federal Reserve Board, as so often happened, confused its regulatory duties with assisting the banks.\u00a0 In 1956 Congress passed the Bank Holding Company Act, intended to stop banks from underwriting insurance.<\/p>\n It should be clear that, at least up to 1956, and for a time thereafter, Congress understood to a degree the perils of leaving financial institutions to their own devices.\u00a0 The intent of Congress seemed to be to let commercial banks be commercial banks, let investment banks be investment banks, and let insurance companies be insurance companies.\u00a0 The nation had not yet descended to the moral and ethical pits of reducing faith in the “free market” to religious principle.<\/p>\n With the election of Ronald Reagan the dismantling of government regulation proceeded in earnest.\u00a0 Concomitantly, despite the ideological declarations of Reagan and his acolytes, most of the “principles” of the so-called conservatism espoused by Reagan actually fell by the wayside.\u00a0 Government grew as never before.\u00a0 The Federal deficit exploded.\u00a0 The only thing that diminished was the scale of regulation.\u00a0 The two-decades long process of placing political power, and by extension financial power, in the hands of those with the wherewithall to purchase it was underway.\u00a0 Why did government grow so rapidly?\u00a0 Why did the deficit balloon, seemingly out of control?\u00a0 Well, in concrete terms, there was a hidden agenda.<\/p>\n Government grew so as to make it less useful to the average citizen.\u00a0 Federal deficits grew so as to transfer wealth from you and me to those who were already wealthy beyond any dreams of avarice.\u00a0 All apologists for the so-called free market are captives of their own fantasies, but they are useful to those who surreptitiously pick our pockets.<\/p>\n Under Reagan, the maximum income tax rate was reduced from 70 percent to 28 percent.\u00a0\u00a0 Meantime, the regressive Social Security and Medicare payments were increased, placing a burden on those with lower incomes.\u00a0 The rich pay a negligible part of their incomes on Social Security and Medicare.\u00a0 FICA collections for Social Security are capped, making the tax regressive.\u00a0 Effectively the tax policy of the Reagan Administration lowered taxes on the rich and raised them for the poor and middle class.\u00a0 Lowering taxes on the rich supposedly increases<\/em> tax revenues because cutting taxes for the rich is alleged to be an economic stimulus. \u00a0 <\/em>Succeeding Presidents have largely adhered to this “trickle-down” theory.<\/p>\n Corporations, not to be outdone by individuals, have their own finagling perks.\u00a0 Although the maximum tax rate for corporations is 35 percent, there are so many exclusions and deductions, not to mention direct payments by the federal government, virtually all large and many smaller corporations do not pay anything like the maximum rate.\u00a0 Some pay no tax at all.\u00a0 They are materially assisted in reducing their taxes to zero by enormous federal subsidies to various industries.\u00a0 These subsidies are paid for by ordinary citizens in the form of higher prices, higher taxes in the lower brackets, and now most commonly by government borrowing, which moves the burden of payment to our descendents.<\/p>\n With the advent of economic globalization, domestic manufacturing has\u00a0 declined significantly.\u00a0 Capitalism, despite the claims of unbounded benefits by ideologues, is amoral at best, and will always seek to pay the lowest wages possible, and that means blue collar jobs have gone elsewhere. \u00a0 As a result, industrial capitalism no longer drives the economy.\u00a0 Supposedly the United States is now a service economy.\u00a0 But just what is being served?\u00a0 Economic mayhem.<\/p>\n The FIRE sector is now the driving force of America.\u00a0 Finance, Insurance, and Real Estate.\u00a0 But before the FIRE sector could bubble to the top, obstacles had to be removed.\u00a0 Regulatory obstacles.\u00a0 Although some relaxations of Glass-Steagall had been implemented, with minor exceptions it was still formally forbidden for commercial banks, investment banks, and insurance companies to operate as a single entity.<\/p>\n In 1998 Travelers, an insurance company, purchased Citibank, a bank holding company.\u00a0 Technically this was illegal, but Travelers and Citibank knew something the rest of us did not.\u00a0 Many have characterized this merger as a big gamble, but it actually provided the perfect excuse to remove almost all restrictions on financial capitalism.\u00a0 In 1999 Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act.\u00a0 Gramm-Leach-Bliley made it possible for a single giant corporation to carry out commercial banking, investment banking, merchant banking, securities underwriting, dealing in, holding, and underwriting municipal bonds, and to both underwrite and trade in insurance.\u00a0 The Act specifically allowed Bank Holding Companies to become Financial Holding Companies.\u00a0 The latter may engage in any financial activity, or incidental to financial activity, or complimentary to financial activity.\u00a0 That would seem to cover pretty much everything.\u00a0 Passage was bipartisan with the Senate approving by 90-8 and the House voting 362-57.\u00a0 President Clinton, ever the free market cheerleader, signed the bill into law.<\/p>\n With this single Act, the establishment of the corporate state was complete.\u00a0 All the old rules were gone, and virtually anything was permitted.\u00a0 Freed of any restraints, finance capitalism set out to fleece the nation.\u00a0 Corporations no longer actually made much of anything within the confines of the United States.\u00a0 It was much cheaper to pay what amounts to slave wages in other countries, with possibly some assembly operations still done domestically.<\/p>\n Many, many nefarious activities came to be regarded as benevolent contributors to the progress of the nation.\u00a0 Two in particular became dominant drivers of the economy: housing and creative finance.\u00a0 A ruling by the Federal Reserve and the Treasury Department permitted Financial Holding Companies to engage in real estate brokerage.\u00a0 Banks no longer were restricted by meaningful rules about how to construct mortgages.\u00a0 Banks could now grant mortgages to just about anyone who was still breathing.\u00a0 No down payment required.\u00a0 No proof of income required.\u00a0 It didn’t matter if the borrower understood word one of the mortgage contract.\u00a0 Balloon and adjustable rate mortgages became common.\u00a0 The success of either depends on the willingness of the mortgage writer to refinance, usually after 5 to 7 years.\u00a0 Many borrowers, too many it turns out, could not pay the balloon payment or the new adjusted rate, and banks became increasingly unwilling and in fact unable to refinance, as they were far too highly leveraged due to the devastation of the derivatives markets.<\/p>\n There’s a catch.\u00a0 A whole bunch of catches, in fact.\u00a0 One is that with requirements for creditworthyness removed, many mortgages are so-called subprime.\u00a0 Subprime lending also occurs in the auto loan market, and in credit card transactions.\u00a0 Defaults and foreclosures on subprime loans occur at a much higher rate than on prime loans.<\/p>\n Another catch is that virtually all such loans, and mortgage loans in general, are securitized<\/em>.\u00a0 They are packaged into a kind of asset based security known as Collateralized Debt Obligations.\u00a0 Essentially no one knows the fate of any particular loan, so it became easy to assign risk categories, or tranches<\/em> fraudulently.\u00a0 Also as mark-to-market practices became increasingly adopted by corporations, fraud was inevitable when mark-to-market values were assigned to securities for which no meaningful value could be determined.<\/p>\n Sundry rationalizations were invented designed to assure investors, borrowers, and regulatory agencies that these instruments were safe.\u00a0 So safe in fact that the rationalizers convinced themselves they could make lots more money by selling insurance on CDOs and similar doomed derivatives.\u00a0 Thus Credit Default Swaps were invented.<\/p>\n All of this was a house of cards, as the housing and credit card markets were financed by debt assigned to those who could not honor it.\u00a0 The government simply looked the other way, basing its indifference on the declarations of Federal Reserve Chairman Alan Greenspan that the financial capitalism industry could be relied upon to regulate itself<\/em>.\u00a0 It turns out that the only thing the Wall Street Masters of the Universe could be relied upon was to cheat.<\/p>\n The result of all this basically criminal activity was the financial meltdown of 2008, leading to the recession of 2009.\u00a0 Here’s the problem:\u00a0 The Federal government went deeply into debt in order to “bail-out” Wall Street.\u00a0 Trillions of dollars have been given to institutions that are fundamentally corrupt.\u00a0 Even though we should now be painfully aware that the giant financial entities created after passage of Gramm-Leach-Bliley are not just unworkable but lead inexorably to corruption and criminal acts, the government wants to return to the situation obtaining before things fell apart, with of course a few new regulations thrown in to keep all those crooks honest.\u00a0 How is this paid for?\u00a0 By selling Treasury notes to mostly to foreign governments and by printing money.<\/p>\n The only thing we citizens are going to reap from all this rescue stuff is more of the same.\u00a0 The short term solution is to repeal Gramm-Leach-Bliley, restore Glass-Steagall in a modern version, and force regulatory agencies to do their job.\u00a0 Repeal of Gramm-Leach-Bliley would force the breakup of Financial Holding Companies, and proper separation of economic activities would be assured.<\/strong><\/p>\n The financial integrity of the economy, such as it was, can be restored, but not for long.\u00a0 The whole scheme is predicated on the idea of getting the economy growing again.\u00a0 Unfortunately this will only be possible over the short term.\u00a0 Capitalism, with its fixation on perpetual growth, is fundamentally unsustainable.\u00a0 Ultimately, we must turn away from the religion of growth and turn instead to a way of life that depends on community not competition, compassion not amorality, and restraint rather than greed.<\/p>\n","protected":false},"excerpt":{"rendered":" The uproar about bonuses awarded to AIG employees would be hilarious were it not so troubling and pathetic. It is almost emblematic of the refusal of virtually all, government, politicians, pundits, citizens, all, to see what is staring them in the face.<\/p>\n The solution to all this, at least for the short run (the next […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"_links":{"self":[{"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/55"}],"collection":[{"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=55"}],"version-history":[{"count":15,"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/55\/revisions"}],"predecessor-version":[{"id":82,"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/55\/revisions\/82"}],"wp:attachment":[{"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=55"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=55"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/serpentsanddoves.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=55"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}