Privatized Gains, Socialized Losses (Part Two)

(Note: This is the second and concluding segment in a two part series.  The first segment documented how the forces of Wall Street appeared to “outsmart” the US government once again.  Finding a creative way to promote and package financial derivatives, Wall Street escaped protective federal regulation.  As a consequence, a financial bubble ensued, followed by the Great Recession of 2008 from which the masses of ordinary citizens are now attempting to recover.)

Are the stewards of the law capable of keeping up with the powerful forces of Wall Street this time around?  When the financial crisis has abated and things return to a state of normalcy, do we conveniently forget the lessons of history?  What, if anything, keeps us on a forward course, refusing just to ride the cycles of boom and bust, ascent and decline?

In the aftermath of the Great Recession of 2008 the US Congress with President Obama’s strong backing has passed what we are advised is the most sweeping expansion of financial regulatory reforms since the Great Depression.

But, but within minutes of the bill’s passage, several Wall Street groups were leveling criticism at the new regulations, as was The Business Roundtable, the US Chamber of Commerce and other business organizations.

The substance of the law is said to subject more financial companies to federal oversight and regulates many derivatives contracts, while creating a consumer protection regulator and a panel to detect risks to the financial system.  However, a number of the details have been left for regulators to work out, “inevitably setting off complicated tangles down the road that could last for years.”

Before signing the legislation, President Obama remarked that “because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes.”  Mr. Obama said that “There will be no more taxpayer-funded bailouts.  Period.”  Ordinary citizens, however, are expressing frustration and doubt in attempting to take Mr. Obama at his word.  This stems from a working knowledge of the history and underpinnings of the US financial industry, dating back to Alexander Hamilton and his plan for US capitalism based on the British model.

But does anyone doubt the profit-induced mindset of Wall Street to creatively devise new ways to bypass Federal legislation again, no matter how well conceived that legislation appears to have been?  And does anyone also doubt the human element that federal regulators will once again be asleep at the switch, when the time comes for decisive action?  Last time, it took about 75 years for Wall Street to circumvent the Feds, a tribute in and of itself to the staying power of the New Deal.  This time, surely it is again not a question of if, but when.  Where profit is concerned, Wall Street has also proven to be very patient in biding its time.

While ordinary citizens may rightfully give Mr. Bernanke a pass, presently, they are also angry.  The federal government has bushels of money for Wall Street, the large banks, insurance companies and the auto industry, to name but a few, while Main Street is left to fend for itself.  The results and the present economic malaise are apparent.

Frustration and anger are rooted in the reality that the rules of the game are neither particularly fair nor the playing field level.  Raw emotions are heightened by the fact that financial gain from success is privatized, while loss from failure is socialized.

That is, if Wall Street takes a financial risk which succeeds, Wall Street doles out the reward to individuals privately.  On the other hand, if Wall Street’s gamble should fail, the loss is spread out socially among the masses of ordinary citizens.  As a consequence, it is said that there is no accountability on Wall Street.  It is also of little consequence that the risk taken is seemingly reckless, great enough in fact to take down the entire national economy.

Frustrations and anger are further magnified by the fact that ordinary citizens must live within their means.  That is to say, ordinary citizens cannot spend what they do not have.  If the money is not there, spending must be reduced and consequently brought back into balance with income or revenue.  Ordinary citizens wonder, if these are the rules of the road, then why do they not also apply equally to their state and federal governments, which are awash in a sea of financial debt and borrowing?  Of course, it is not always that simple.

Are we ordinary humans capable of not only aiming higher but also achieving real, meaningful progress?  Then-US Senator, Barack Obama, has expressed similar sentiments:

I wonder, sometimes, whether men and women in fact are capable of learning from history --- whether we progress from one stage to the next in an upward course or whether we just ride the cycles of boom and bust, war and peace, ascent and decline.

Given the predictability of our imperfect human nature, one can only wonder.

-Michael D’Angelo

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