I just watched a great documentary by Vice on HBO called Panic: The Untold Story of the 2008 Financial Crisis. Anyone who watches that, The Corporation, Inside Job, Margin Call, and The Commanding Heights will be well-schooled on how the financial services industry works and how it fails to work. In this blog, I want to briefly describe the Great Recession and the resultant Tea Party movement, which is tied in to the Trump phenomenon. The profit motive, financial deregulation, elitism, politics, and the Great Recession have something to teach us if we are to avoid another, potentially catastrophic meltdown.
I almost reflexively believed for the last 10 years that the situation could be fairly easily and accurately described as plutocracy, oligarchy, elitism, and socialism for the rich. I have come to somewhat feel that that is the narrative that many on the left and the right took from the crisis, but it’s a bit more complicated than that I think.
Having watched Panic, I am fairly convinced that Henry Paulson, Timothy Geithner, and Ben Bernanke were not mustache-twisting villains who foisted a bum steer on the American people. It’s more nuanced than that. I think it’s fair to say that they were indeed members of the ruling class, sociologically speaking, but also that all three were at the wrong place at the wrong time. Shit happened which stretched back beyond their tenures in government. Or, at least, with Paulson and Geithner, they could possibly be described as little cogs in a huge machine spinning out of control. Again, I think they all were elite, for sure, but there is more to the story.
“Part of this disquiet has to do with the market system’s inability to continue delivering a steadily rising standard of living to the average household, as it had for the previous half-century. In the 15-year period from 1953 to 1968, the inflation-adjusted income of the median American family increased by 54 percent. In the 15-year period from 2001 to 2016, the increase was just 4 percent. No wonder that just 37 percent of Americans now believe they will do better financially than their parents, the driving idea behind the American Dream.
But another part of our disquiet reflects a nagging suspicion that our economic system has run off the moral rails, offending our sense of fairness, eroding our sense of community, poisoning our politics and rewarding values that easily degenerate into greed and indifference. The qualities that once made America great—the optimism, the commitment to equality, the delicate balance between public and private, the sense that we’re all in this together—no longer apply.” ~ Steven Pearlstein
The financial crisis in 2008 stretched as far back as Reagan, who made some moves toward deregulating the financial industry. As well, Clinton’s apparently-well-intentioned requirement that a certain number of loans go to sub-prime borrowers let out chickens which eventually needed to come home to roost. Of course, the culture of Wall Street, populated as it was with tens of thousands of alpha types with a hard-on for money, power, and prestige was absolutely essential. Banks and quasi-government institutions such as WaMu and FannieMae were not doing a great job at much besides the profit motive. Credit ratings agencies and appraisers were apparently complicit in what a friend of mine who writes on this topic called a corrupt system.
This was a quintessentially American phenomenon, and it showed our strengths as well as our weaknesses. Politicians dithered. Elites felt entitled. People were ignorant or misinformed. Businessmen and their female counterparts were greedy and myopic. The profit motive superseded almost all other social goods and values. The utterly integrated nature of the whole system proved to be a crucial weakness. We were a Western town in 1845; everything was made out of wood, the water supply was mostly commandeered by the wealthiest ranchers, and the volunteer firefighters were drinking in the saloon when fire broke out. It almost engulfed everything. Most involved were in the saloon gambling and drinking instead of engaging in some other more wholesome activity.
These facts which led to the meltdown are why I am more sympathetic to a crowd I usually don’t feel much empathy for: Paulson, Geithner, Bernanke, Summers, Greenspan, Boehner, Bush, McConnell, Dimon, Blankfein, Mack, and so on. In a word, the shit was hitting the fan and something needed to be done. The time for lamenting that we had a financial sector that was absolutely addicted to the profit motive, overleveraging, opaqueness, deregulation, and bonuses was five or ten years prior. In 2008, we needed drastic action.
When investor extraordinaire (and generally profit-driven but overall a responsible human being) Warren Buffett said he didn’t invest in derivatives and such because he didn’t understand them, it was really telling. The fact that Nouriel Roubini of NYU and a few others saw the meltdown years before it occurred indicates that there were clear weaknesses to the whole “packaging questionable mortgages as derivatives and selling them to investors” approach. It was easy money because it was bereft of our better judgment. You can’t allow the fox to guard the henhouse; there is only one reasonable result and it is predictable.
“In 1800, just 20 percent of American workers had an employer other than themselves; by 1900, the figure was up to 50 percent, and by 200, 90 percent.”
This is how my friend, who was writing $15 million in mortgages a month back in the early 2000’s, characterizes the situation:
“Wall Streeters were as much victims as culprits. Bankers, Fannie Mae, Freddie Mac, and many Senators were the actual villains. Politicians threatened banks and subprime lenders to write paper they knew was no good. They were left holding the bag with whatever Fannie and Freddie wouldn’t buy so they came up with derivatives and credit swaps to get the bad paper off their books. There is still a trillion dollars in “ghost mortgages“ on books today.” I’m not sure I have the insight and knowledge to know how true this is, because Robert and I disagree about some very fundamental issues in economics. But he certainly has spent 1,000-times the time and effort learning the system. So his opinion should be heard.
Recessions come and go, but 2008 was a calamity. I think Paulson and others probably did the best they could. No one had a stomach for passing on “subsidized risk” to the taxpayers. The fact that banks gambled and either won or didn’t really lose was unpalatable to say the least. I believe that Bush was given two choices: bad or worse. He chose bad. I don’t think we can blame him. We now have an over $20 trillion debt simply because we have uncontrolled expenses and many of us don’t pay very much in tax; spending $1 trillion to “bail out” the banks was lamentable but it could have led to a Great Depression if unstopped. We had to swallow a bitter pill of our own making.
This profligacy and overfed profit motive and institutional breakdown created great anger in the populace. When combined with bad optics and some other long-term trends, the solutions these guys enacted to prevent financial disaster went over “like a lead zeppelin“, as they say. The Tea Party, based in large part on Sarah Palin’s demagoguery as anything, came into being. So did Occupy Wall Street. These organizations were, at heart, something positive and very American.
However, let’s face it, the Tea Party never formed in the preceding years, when a white Republican was president. Admittedly, there were factors that masked and hid the underlying financial fundamentals which, obviously, were troubled and dangerous. For instance, if you start to consider your house an investment instead of a domicile, and you see your neighbor cash $100k out of theirs and buy the BMW, you too are going to face internal desires to live “higher on the hog” if you will. The fact that wages were relatively stagnant and education and healthcare were costing more could be lost on you if you were trying to “keep up with the Joneses” and saw a 1% increase in the market value of your house on a monthly basis.
“Ultimately, the choice is not between one philosophy of government that supports policies of “tax and spend” and one that does not. Rather, it is between one that taxes and spends for the good of the wealthiest 0.1 percent of us or one that attempts to address the concerns of the other 99.9 percent.”
Greed (a.k.a. the profit motive on steroids) is as much American as any other positive virtue. Let me be clear as a real estate investor (a hat I wear): the profit motive is not something shameful per se. I am not saying that it isn’t fair to earn money to perform service, make some good, or invent something useful and harmless. I am saying that as far as the virtue of human activity and intentions is concerned, making money is not high up there. What religion or excellent philosophical approach to life makes the profit motive its highest aim? None. Ask a Christian theologian what moves humanity and they will tell you love, charity, peace, modesty, care, concern, humility, empathy, and study. The profit motive was soundly criticized by Jesus while he was alive, and this tradition has played a deeply significant role in theology since.
But I digress. The Tea Party also had its origin in the fact that Bush and his cronies oversaw a relatively unregulated Wall Street and, coincidentally, handed a horrible economy to a man who, though he was half African-American, appeared to many to simply be “black.” If you see a black man bail out an automaker with your government quill, it can irritate you if you are harboring racism, like most of us do.
The fact is that TARP and other measures aimed at repairing an American economy that was built on a house of cards in certain ways was profitable for the American taxpayer is often lost on us. That is, we loaned money to various financial institutions and manufacturers and corporations, and once the bleeding stopped, the healthier organizations were better able to not only keep people employed and honor pensions, but pay back the money the government invested in them. It felt like “socialism for the rich” and “capitalism for the poor,” and many people suffered immensely. Retirement accounts were slashed. Some committed suicide. It was a tough time.
“Long dead now is the one who might have done it: I mean John Maynard Keynes, who wrote the haunting essay “Economic Possibilities for Our Grandchildren.” In that long-ago essay (1930), he talked of a world in which his grandchildren would not really have to work. Or not in the old way. We’d write. Read. We’d have long afternoons full of cigarettes and novels.”
The Tea Party was thus built on some true and ugly factors – racism, demagoguery, political pandering and opportunism, ignorance – as well as righteous anger at the way elites gamed the system.
The fact that some banks honored their contractual commitments to pay bonuses was particularly noxious to many to witness. It looked like the epitome of crony capitalism and elitism. The average American was feeling squeezed and completely out of control. It was a largely fair assessment of how this society works. We’re talking about social and economic justice here, and it’s not pleasant to feel.
The Tea Party movement pulled Congress to the right. Just tonight I heard Congressman Yoho on television defending Trump and the “Freedom Caucus” from criticism. There is some legitimacy there – the disgust at political and economic elites playing by a totally different set of rules compared to the “common man”, for example – but mostly the movement is just a Republican gimmick. Does it not seem weird that the movement disappeared, even though the man in the White House and that twerp McConnell are overseeing a reduction in government regulation of all manner of industries? Clean coal – that’s an oxymoron. What about the deficit and the debt? Why aren’t folks picketing the White House today?
“The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Enter Trump and his unique brand of bigotry, fascism, demagoguery, ignorance, showmanship, unscrupulousness, and elitism. He whips up a crowd of Tea Party types, and few on that side of things seems to get that the man became a millionaire at age 8, wrecked many businesses, took advantage when he could, and generally doesn’t measure up to more successful, transparent, and conventional businesspeople (e.g., Mark Cuban, who thinks Trump as businessman was “an idiot”). You hear Trump’s lawyer/fixer drop the dime on Trump, and not a peep from Tea Party types about corruption. What would it take to get these folks to admit that they have been duped by a multi-millionaire crook masquerading as a man of the people? It shows how bad our a) education system or b) political/economic system is that the masses can be that myopic and manipulable.
It galls me that the system is what it is. We should be doing so much better – this, the most advanced and one of the best countries in the history of the world. We have all the assets needed to make life here better for all our citizens.
When healthcare is outrageously expensive because of the profit motive; when the economy almost collapsed because of the profit motive; when private prisons and weapons manufacturers are based on the profit motive; and when corporations are given lax standards because of the profit motive, we have a lot of work to do. Wages are only now ticking up at a very modest pace; the minimum wage should be in the $20’s per hour by now if workers saw a fair share of the economic gains seen since 1960. It’s a terrible shame that so many people don’t see that Trump is just the latest in smarmy and self-centered politicians to hit the scene – except with much less moral sensibility and public accountability.
I think we all can agree that the government has an inappropriate role in the financial markets – at once too much intervention and too little. It has its thumb on the scale more than it does engage in legitimate and necessary regulation of the profit motive. Unfortunately, at this rate, the people are being led astray by a demagogue and a somewhat decent economy, and aren’t going to be prepared when the next recession comes. Factors like unemployment signal a good economy, but stock market volatility, currently low-interest rates, low wages, debt, and deregulation foreshadow a serious financial crisis in the future. Remember banks being “too big to fail”? That is a problem that has not been successfully addressed by our politicians and their tit-for-tat relationship with the outsize financial services industry. And as some market gurus are predicting, this next time around could really hurt because we are so much more polarized, dysfunctional, debt-ridden, and addicted to low-interest rates. I desperately wish we could see the writing on the wall and change our financial sector before they get themselves into deep trouble again. There is no way that Trump and his band of idiots can get us out of another crisis of that magnitude. Ω
“The problem is the profit motive: for corporations, there’s no such thing as ‘enough.’”