(Note: This is the first segment in a two part series.)
Is the ordinary citizen capable of learning from history? If so, how did the powerful forces of Wall Street “outsmart” the
government once again? Do we progress
from stage to stage on an upward course?
Or do we just ride the cycles of boom and bust, ascent and decline? US
Change is an interesting concept, the need for change a provocative one. Is “change” but a subtle deviation from the existing order, yet sufficient for the ordinary citizen to recognize some difference from what was seen before? The reasons for change are sometimes not all that different than those articulated even in long bygone eras, dating back to the time of the Revolutionary War.
Take, for example, the Great Recession of 2008. Innovative thinkers on Wall Street created new financial instruments, like private mortgage backed securities, which the ordinary citizen was told somehow fell outside the scope of federal regulation. Through these financial derivatives, the phenomenon of sub-prime residential mortgage lending was born and proliferated.
The impact of these derivatives was also exaggerated by a new type of financial investment vehicle called a hedge fund, which used leveraged, long, short and derivative positions with the goal of generating high returns. It was said that, unlike mutual funds, hedge funds were for the most part unregulated, because they cater to “sophisticated investors.”
The problem was compounded when federal regulators were found asleep at the switch. The forces of Wall Street capitalism had finally figured a way to circumvent the protections which F.D.R.’s New Deal administration had painstakingly put in place. Central protective measures, designed not only to counteract and consequently help pull us out of the Great Depression but also to ensure that it would never be able to occur again, were simply bypassed.
In simple terms, over the past 25 years the discipline of regulating financial companies had undergone a significant change. A phenomenon which was politically bipartisan in nature, the culture permitted a gradual yet alarming relaxation of the safeguards from F.D.R.’s New Deal. Seemingly, it had been the policy of the federal government that all citizens should be entitled to “own” a home, whether they could afford one, or not.
The phenomenon culminated with the policy of the Bush/“43” administration to let the financial industry do pretty much what it wanted. When the bubble burst, the
thrust into and we are told now emerging from what is being referred to as the
Great Recession of 2008. Statistically,
it was the worst economic contraction since the time of the Great Depression of
Unemployment also is and remains high, inordinately high by historical standards, stubbornly around 8% of the available work force through May 2012. Among certain groups, African Americans and the young in particular, the unemployment figures are significantly worse. Generally, economists define “full” employment at an unemployment rate of 3% for persons 20 and older, 4% for person age 16 and over, of the available work force. That puts the number of unemployed who are seeking work at somewhere between 15.5 million and 18.6 million.
The federal government’s solution was, in simplistic terms, to bail out and prop up the banks, insurance companies and the auto industry. The rationales articulated were many. It was said that these large institutions had become “too big to fail,” that if they failed, collectively, the economic fallout from refusing to act to “save” them would have produced a devastating ripple effect. A financial bailout would produce less pain than allowing the natural market forces to otherwise work. The chairman of the Federal Reserve, Ben Bernanke, an expert on the causes of the Great Depression, had stated so with great authority and urgency.
Mr. Bernanke is a very smart man, the bipartisan respect that he enjoys a testament to the wisdom of his policies. Mr. Bernanke also seems to have a gift of plain speak, such that he relates and communicates well with ordinary citizens. Consequently, Mr. Bernanke has earned the trust of ordinary citizens, who acquiesce to his policies, which do seem to be working. Some progress is apparent but remains excruciatingly slow, especially for the millions of ordinary citizens who continue to be unemployed.
(Next week’s second and concluding segment in this series highlights the most sweeping financial regulatory reforms which the Obama administration and Congress have enacted since the Great Depression. But the frustrations of ordinary citizens are seemingly compounded by a system which persists in treating the moneyed class with preferred status. In addition to a bailout which is not the right of every citizen, why are financial gains said to be privatized while corresponding losses socialized among the American public?)