Barreling along the road of life with only low beams for illumination, today's headlines replace yesterday's and yesterday's problems are soon replaced with today's. The economic crisis gets replaced, if even for a short time, by terrorist attacks in Mumbai. Top stories of the day seem to demand equal attention, whether it's a child kidnapping or the end of the world as we know it.
A meeting between Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke with congressional leaders on the evening of September 18 placed the current financial crisis squarely in the nation's headlights! Congressional leaders were stunned! Senators gulped! Paulson had a plan, but we had to move fast! He needed $700 billion and he needed it now! The original language stated: "Decisions by the Secretary pursuant to the authority of the Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Whoa!
Paulson's plan was only three pages long. We were in crisis mode. But why?
The other day I was browsing through old podcasts of
On Point with Tom Ashbrook. I found one from January 23, 2008,
Global Market Meltdown?, with guests Jeffrey Frankel, Robert Kuttner, Philip Coggan and Amit Seru. This conversation followed two days of turmoil in the stock market and a three quarter percent cut in the federal funds rate. Kutter, co-founder and co-editor of
The American Prospect magazine, who had been predicting a tough recession for months, told Ashbrook that
"this was a needless recession, caused by excessive financial engineering that now has led to serious damage to the balance sheets of large financial institutions which then cascades into the rest of the economy." A month earlier he had written an article,
The Solvency Crisis, for the American Prospect, where he referred to the unfolding crisis as a
"perfect economic storm". He wrote:
"Ours is a resilient nation. The eventual recovery will require a repudiation of free-market economics, as bold as the New Deal."
So why, in September 2008, were we in what seemed to be such a reaction mode? I decided to go wandering through
Wikipedia for some answers.
"in the mid- to late 1970s or early 1980s, structural shifts of dramatic proportions took place in a number of countries that led to significant increases in financial transactions, real interest rates, the profitability of financial firms, and the shares of national income accruing to the holders of financial assets. This set of phenomena reflects the processes of financialization in the world economy . . .
". . . finance benefits handsomely from the same processes that create economic crises and injure so many others. Hence the costs of financial crises are paid by the bulk of the population, while large benefits accrue to finance. Duménil and Lévy provide new and valuable data documenting these trends in the case of France and the USA . . .
"Using the case of the US economy, Crotty argues that financialization has had a profound and largely negative impact on the operations of US nonfinancial corporations. This is partly reflected in the increasing incomes extracted by financial markets from these corporations; trends identified also by Duménil and Lévy and Epstein and Jayadev. For example, Crotty shows that the payments US NFCs paid out to financial markets more than doubled as a share of their cash flow between the 1960s and the 1970s, on one hand, and the 1980s and 1990s on the other . . .
"Financial markets’ demands for more income and more rapidly growing stock prices occurred at the same time as stagnant economic growth and increased product market competition made it increasingly difficult to earn profits. Crotty calls this the ‘neoliberal’ paradox. Non-financial corporations responded to this pressure in three ways, none of them healthy for the average citizen: 1) they cut wages and benefits to workers; 2) they engaged in fraud and deception to increase apparent profits and 3) they moved into financial operations to increase profits. Hence, Crotty argues that financialization in conjunction with neoliberalism and globalization has had a significantly negative impact on the prospects for economic prosperity."
And this is going to cost us how much to fix?
According to Wikipedia, the end of the post-WWII
Bretton Woods system of fixed international
exchange rates and the decoupling of the U.S. dollar to gold in 1971 were significant impetuses to the rise of financialization.
Another, possibly more significant, contributing factor was the
Commodity Futures Modernization Act of 2000. This bill repealed the ban on
single-stock futures and deregulated
credit default swaps. The bill was introduced in the House on December 14, 2000, and in the Senate on the following day - just prior to the Christmas break. There were no hearings and no debate. Republican leadership incorporated this act,
H.R.5660, by reference into the 11,000 page long omnibus bill,
The Consolidated Appropriations Act for FY2001. Both Republicans and Democrats overwhelming supported this budget bill, the Senate passed it by unanimous consent, and President Clinton signed it into law on December 21, 2000.
This is going to cost a lot of money to fix. And it's not enough to just get the old system running again. On September 26, French President Nicolas Sarkozy, currently also the
President of the European Union, said
"We must rethink the financial system from scratch, as at Bretton Woods."[
*] On October 13, British Prime Minister Gordon Brown said:
"We must have a new Bretton Woods, building a new international financial architecture for the years ahead."[
*] The latest step toward a new financial system was the
G-20 Leaders Summit on Financial Markets and the World Economy, on November 14-15, 2008, in Washington, D.C.
It will be interesting to see what happens.
...subject to revision...
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