Privatized Gains, Socialized Losses (Part One)

(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 US 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?

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 US was 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 the 1930s.

Main Street is and remains hurting - in a big way, its businesses, or those that remain standing, largely depressed.  Belts are squeezed perilously tight.  The nation’s banks are not lending in abundance, although they appear to have an abundance of money to lend.  Demand is simply lacking.

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?)

-Michael D’Angelo

Swimming in a River of Wealth (Part Two)

(Note: This is the second segment in a two part series. The first segment traced wealth disparity to the inevitable forces of US capitalism. Since the end of the Great Depression, the precious few who are swimming in a river of wealth have consolidated and extended their gains smartly through greater and greater control of the various mechanisms of government, seemingly now in perpetuity...)

How and why did we let it happen again? What threats are posed by increased military spending or a fall in union membership? Why are an emphasis on individual initiative in concert with a deregulated business environment, and specifically financial deregulation, particularly hazardous to economic equality?

F.D.R.’s New Deal social safety net polices were embraced by ordinary citizens. The signature twin legislative triumphs included the 1935 National Labor Relations Act (NLRA) and Social Security Act (SSA). NLRA delivered the right of every worker to join a union of his or her own choosing and the corresponding obligation of employers to bargain collectively with that union in good faith. While SSA required the states to set up welfare funds from which money would be disbursed to the elderly, poor, the unemployed, unmarried mothers with dependent children, and the disabled. SSA was labeled a triumph of social legislation.

Following World War II, a Cold War “containment” policy was conceived to check the communist threat. This created fertile conditions for increased military spending on national defense and to discharge American commitments around the world. Perhaps more than any other single factor, federal military spending helped revive the economy of the Old South, which had been dormant for nearly eight decades dating back to the Civil War. The healthy effect on the domestic economy was palpable.

But by 1960 President Eisenhower's Farewell Address warned Americans about possible future problems. In particular, he pointed out the “military-industrial complex,” a new term in the lexicon of ordinary citizens. This complex, an alliance between government and business, had the potential to threaten the democratic process in the country.

Lyndon Johnson’s 1965 Great Society and War on Poverty, which championed government as the great provider, achieved admirable success as a high water mark of 20th century liberalism. But by 1980 the Reagan Revolution swept in. Almost overnight, American positivity and patriotism experienced a resurgence, President Reagan persuading Americans to rethink old attitudes about government as provider.

Popular rights asserted themselves on the federal union shop floor. However, statistics showed that as union membership decreased, wealth disparity between rich and poor increased. And so it came as little surprise to some that income inequality has worsened at a time when union membership has fallen to levels not seen since the 1920s.

Nonetheless a surge of individual spirit flourished, as federal government regulations were scaled back. In fact, in the last 30 years the US experienced a deregulated business environment which many agree is without parallel in US history. This was coupled with a massive military build up in declaration of a moral war against the Soviet Union. To speak against this foreign policy in the name of national defense was to receive the label of “un-American.” The river was healthy and well-stocked, and so the wealthy swimmers experienced an unprecedented level of prosperity. It was only a matter of time before they indulged in the grand feeding.

Wall Street minds are typically a step ahead of the government, innovating, devising new ways to facilitate the age old obsession with moneymaking. The law does its best just to keep up. Finally, with an assist from the US Congress the New Deal’s financial regulations came down and with them the walls to ensure that a Great Depression would not occur again. In theory, federal oversight was still present. But the regulators conveniently fell asleep at the switch.

The ordinary citizen is told that the federal government bail out of Wall Street and the large corporations in 2008 narrowly averted the phenomenon of another Great Depression. However, what phenomenon, if any, will provide the impetus to reverse and level the disparity of wealth between the very rich few and the mass of ordinary citizens this time around? Aren’t those in charge now the very same people who were in charge before the crisis? Perhaps this disparity in wealth as sanctioned by the federal government is but the essence of the Occupy Wall Street protest movement currently spreading to major US cities across the continent.

In an August 2010 New York Times Magazine article entitled “Income Inequality and Financial Crises,” author Louise Story cites to David A. Moss, an economic and policy historian at the Harvard Business School, who has spent years studying the phenomenon of income inequality. Mr. Moss has hypothesized that growing disparity between the rich and poor is not only harmful to the people on the bottom but also creates serious risks to the world of finance, where many of the richest earn their great fortunes.

In fact, as he studies the financial crisis of 2008, Mr. Moss says that another crisis may be brewing. When he accepted the suggestion of a colleague that he overlay two different graphs --- one plotting financial regulation and bank failures, and the other charting trends in income inequality --- he was surprised that the timelines danced in sync with each other. Specifically, income disparities between rich and poor widened, as government regulations eased and bank failures rose.

“I could hardly believe how tight the fit was --- it was a stunning correlation,” he said. “And it began to raise the question of whether there are causal links between financial deregulation, economic inequality and instability in the financial sector. Are all of these things connected?”

It’s a great question.

-Michael D’Angelo