Financial Disservices
by Jackson Dave
If you were wondering three years ago how our banks could be extending six hundred thousand dollar mortgages to families without substantial income, here’s your primer on financial services mismanagement.
A two-pronged catastrophe occurred. Not only were people buying properties they could never afford to pay for, but also normal, responsible folks were using their homes as ATMs, extracting money from their bloated value to finance either a lifestyle beyond their means or investments to “catch the wave”.
The first question is why did we extend ourselves beyond reason?
Answer: We’d been hearing stories about ballooning real estate values---about people making lots of money buying and selling homes, by “trading up”, about buying second and third homes in Boise or Madera---to catch the wave. The financial pages of major newspapers were filled with articles painting rosy pictures of people exercising the American dream on a shoestring. It’s hard to see through so many “experts” who should know what’s on the horizon. How could this financial boom be a fraud when the banks are up to their noses in it and the SEC is watching from the sidelines? How can we resist the lure of a dozen offers each week to lower our mortgage payment---oh, and while we’re at it, why not take a chunk of cash out for a little spree? It’s not even “borrowing”; we’re tapping newly found wealth.
It seems that every so often a pyramid scheme comes around. A real estate agent I knew was wrapped up in one several years ago. Three nights a week she went “pyramiding” at a friend’s home, and was incredulous that I wouldn’t join in. “All you have to do is show up, buy and sell, and the money flows in!”
These schemes take many forms and disguises. When they’re run by “legitimate” investment agents, they’re called “Ponzi Schemes”. The term has circulated recently since Bernard Madoff used it to describe his own financial fraud. They all work the same: Early investors realize quick profits because they are buoyed by the geometric expansion of capital contributed from below. So long as naïve people can be “suckered in” by claims of the early birds, they feed the fire. Soon, however, the expansion required to fund the pyramid requires more buyers from below than are either willing to fall for the scheme or than there are people in the world. One or the other is inevitable. But by then, the core that started the game has long ago cashed out; some of the second generation get the light. Everyone else is left “holding the bag”.
When pyramiding hits the confused financial structure itself, it’s commonly referred to as a “bubble”. In 1719, trying to reform the financial structure of France, John Law, a Scottish immigrant, created the world’s first stock market bubble by claims of riches and beauty in the Louisiana Territory. Consisting mostly of the Mississippi Valley, it was largely a mosquito-infested swamp and considered wasteland even by those living in the colonies. Shares in his Mississippi Company rose from 500 to 15,000 livres. But by summer of 1721, reports describing the territory were circulating on the streets of Paris and the bulls stampeded. Soon the price stabilized back at 500.
Since that event, every forty to fifty years the world experiences another bubble and crash. It would seem that this frequency co-incides with the lifetime or memory of the principals involved in the financial industry.
Law’s spiritual brother, and the father of our present bubble emerged in the 1990s; he was our own Kenneth Lay. With political and oil connections through the Bush family, Lay built Enron Corporation into an energy giant, re-structuring the distribution of energy, just as Law did the financial structure of France. In addition to purchasing vast quantities of energy producers, Enron moved into the position of intermediary between suppliers and users. From this vantage, Enron was able to manipulate supply of energy to large regions (such as California), capriciously staging "shortages" to send prices to stratospheric levels.
During the boom, between February of 1995 and June of 1999, Alan Greenspan delivered only a single, small increase in the interest rates, as well as an abundance of currency to keep the bubble growing. Lay established “special purpose entities” to hide Enron’s debts, and stock soared from under $20 to over $90. On November 15, 2001 Lay presented Greenspan with the Enron Prize for Distinguished Public Service. Two weeks later it notified 4500 workers in its corporate headquarters of bankruptcy---one day after passing out copious bonus checks to upper management personnel. Enron had “hidden” debts of over $25 Billion. In the final months before the announcement, Lay extolled not only the strength, but also the integrity of his corporation to all including his own employees, thus pushing the stock ever higher while he and top managers quietly unloaded their holdings.
Even as Lay and his chief lieutenant, Jeffrey Skilling, were prosecuted, the practices that they had established to hide debts spread through the financial markets through entities roughly known as “joint stock, limited liability” companies. The government’s emasculated regulatory agencies stood on the sidelines either oblivious or in league with the movers and shakers.
A two-pronged catastrophe occurred. Not only were people buying properties they could never afford to pay for, but also normal, responsible folks were using their homes as ATMs, extracting money from their bloated value to finance either a lifestyle beyond their means or investments to “catch the wave”.
The first question is why did we extend ourselves beyond reason?
Answer: We’d been hearing stories about ballooning real estate values---about people making lots of money buying and selling homes, by “trading up”, about buying second and third homes in Boise or Madera---to catch the wave. The financial pages of major newspapers were filled with articles painting rosy pictures of people exercising the American dream on a shoestring. It’s hard to see through so many “experts” who should know what’s on the horizon. How could this financial boom be a fraud when the banks are up to their noses in it and the SEC is watching from the sidelines? How can we resist the lure of a dozen offers each week to lower our mortgage payment---oh, and while we’re at it, why not take a chunk of cash out for a little spree? It’s not even “borrowing”; we’re tapping newly found wealth.
It seems that every so often a pyramid scheme comes around. A real estate agent I knew was wrapped up in one several years ago. Three nights a week she went “pyramiding” at a friend’s home, and was incredulous that I wouldn’t join in. “All you have to do is show up, buy and sell, and the money flows in!”
These schemes take many forms and disguises. When they’re run by “legitimate” investment agents, they’re called “Ponzi Schemes”. The term has circulated recently since Bernard Madoff used it to describe his own financial fraud. They all work the same: Early investors realize quick profits because they are buoyed by the geometric expansion of capital contributed from below. So long as naïve people can be “suckered in” by claims of the early birds, they feed the fire. Soon, however, the expansion required to fund the pyramid requires more buyers from below than are either willing to fall for the scheme or than there are people in the world. One or the other is inevitable. But by then, the core that started the game has long ago cashed out; some of the second generation get the light. Everyone else is left “holding the bag”.
When pyramiding hits the confused financial structure itself, it’s commonly referred to as a “bubble”. In 1719, trying to reform the financial structure of France, John Law, a Scottish immigrant, created the world’s first stock market bubble by claims of riches and beauty in the Louisiana Territory. Consisting mostly of the Mississippi Valley, it was largely a mosquito-infested swamp and considered wasteland even by those living in the colonies. Shares in his Mississippi Company rose from 500 to 15,000 livres. But by summer of 1721, reports describing the territory were circulating on the streets of Paris and the bulls stampeded. Soon the price stabilized back at 500.
Since that event, every forty to fifty years the world experiences another bubble and crash. It would seem that this frequency co-incides with the lifetime or memory of the principals involved in the financial industry.
Law’s spiritual brother, and the father of our present bubble emerged in the 1990s; he was our own Kenneth Lay. With political and oil connections through the Bush family, Lay built Enron Corporation into an energy giant, re-structuring the distribution of energy, just as Law did the financial structure of France. In addition to purchasing vast quantities of energy producers, Enron moved into the position of intermediary between suppliers and users. From this vantage, Enron was able to manipulate supply of energy to large regions (such as California), capriciously staging "shortages" to send prices to stratospheric levels.
During the boom, between February of 1995 and June of 1999, Alan Greenspan delivered only a single, small increase in the interest rates, as well as an abundance of currency to keep the bubble growing. Lay established “special purpose entities” to hide Enron’s debts, and stock soared from under $20 to over $90. On November 15, 2001 Lay presented Greenspan with the Enron Prize for Distinguished Public Service. Two weeks later it notified 4500 workers in its corporate headquarters of bankruptcy---one day after passing out copious bonus checks to upper management personnel. Enron had “hidden” debts of over $25 Billion. In the final months before the announcement, Lay extolled not only the strength, but also the integrity of his corporation to all including his own employees, thus pushing the stock ever higher while he and top managers quietly unloaded their holdings.
Even as Lay and his chief lieutenant, Jeffrey Skilling, were prosecuted, the practices that they had established to hide debts spread through the financial markets through entities roughly known as “joint stock, limited liability” companies. The government’s emasculated regulatory agencies stood on the sidelines either oblivious or in league with the movers and shakers.
So how could our bankers fall for this…with our money? And how did we get involved in this real estate bubble?
It’s easy to see how unsophisticated borrowers fall prey to the lure of a home that they can’t afford at any price, much less a grossly inflated price. The bait is in the promise of appreciation. Just look around: home values are going up fast and have been for years. Even if you can’t afford the home, by buying it you’ll realize the appreciation, which you may extract at any time by selling. It’s foolish not to get the most expensive home possible because that provides the greatest profit. And selling is easy; look at the market! Homes are sold within hours of listing. Unsophisticated buyers, however, don’t buy a home as a personal residence, to cash out and “trade down” into one they can afford.
It’s easy to see how unsophisticated borrowers fall prey to the lure of a home that they can’t afford at any price, much less a grossly inflated price. The bait is in the promise of appreciation. Just look around: home values are going up fast and have been for years. Even if you can’t afford the home, by buying it you’ll realize the appreciation, which you may extract at any time by selling. It’s foolish not to get the most expensive home possible because that provides the greatest profit. And selling is easy; look at the market! Homes are sold within hours of listing. Unsophisticated buyers, however, don’t buy a home as a personal residence, to cash out and “trade down” into one they can afford.
But investment bankers are sophisticated buyers! How did they get involved in this? The truth is our investment bankers haven’t been vetting the instruments they purchase. Only recently, when a Savings and Loan company (the dominant mortgage providers of a generation ago) wrote a mortgage, they scrutinized the borrower carefully. The buyer had to show proof of employment, tax returns, even a bargaining agreement that defined his terms of salary and employment. The banker scrutinized qualifications because his bank intended to hold the paper and shoulder the risk of default.
Since deregulation, “Savings & Loans” are a relic of the past and banks write loans which they sell to other institutions in mortgage packages. They make money on the transaction. One might think that after the S&L meltdown of the eighties, banks would be wary of bad loans, but the government bailed them out, sending a message that would not be soon forgotten. Financial institutions could buy and sell mortgages without worrying about default. With a mortgage buried in a large pool, an individual default is inconsequential anyway.
Economic prosperity of the late 90s, fueled by the “dot-com bubble”, put a surge of capital into the hands of more and more buyers. By 2000, low interest rates had started an explosion of appreciation in home values. In October, 2002, President Bush declared, "We want everybody in America to own their own home." Restrictions on income qualifications for buyers were lifted or ignored, allowing banks to offer "sub-prime" loans to just about anyone. ("Sub-prime" has no relation to the interest rate; it's a function of the financial status of the borrower. A sub-prime mortgage is one that has been sold to a less than "prime" candidate for a loan.)
Since deregulation, “Savings & Loans” are a relic of the past and banks write loans which they sell to other institutions in mortgage packages. They make money on the transaction. One might think that after the S&L meltdown of the eighties, banks would be wary of bad loans, but the government bailed them out, sending a message that would not be soon forgotten. Financial institutions could buy and sell mortgages without worrying about default. With a mortgage buried in a large pool, an individual default is inconsequential anyway.
Economic prosperity of the late 90s, fueled by the “dot-com bubble”, put a surge of capital into the hands of more and more buyers. By 2000, low interest rates had started an explosion of appreciation in home values. In October, 2002, President Bush declared, "We want everybody in America to own their own home." Restrictions on income qualifications for buyers were lifted or ignored, allowing banks to offer "sub-prime" loans to just about anyone. ("Sub-prime" has no relation to the interest rate; it's a function of the financial status of the borrower. A sub-prime mortgage is one that has been sold to a less than "prime" candidate for a loan.)
Finally, with enormous flows of dollars from its trade surplus, China had in essence become our national banker. China was sending up to ¼ of its surplus back to us as credit to fuel the market. This along with low interest rates and high demand were pushing prices ever higher. Large quantities of mortgages began to appear in financial markets without anyone knowing how to assess their risk. Essentially the industry was riding a wave of rising property values. So long as real estate prices increased, banks could buy mortgages with no fear of default. Default was irrelevant because the property could re-sell in a day at higher value; and every time a property turned around, they would make money on the transaction.
In the absence of information on borrowers, lending institutions turn to credit rating agencies to assess the risk on potential investments. Two of the biggest of these firms are Standard & Poors and Moody’s. The banks, through a process they called "securitization", were pooling large numbers of mortgages into loan packages called mortgage backed securities (MBS). They bunched them loosely into groups, with the sub-prime loans going into groups called collateral debt obligations (CDO). The agencies use statistics for their ratings, however, and since the industry had never before seen a market like this, there were no data upon which to assess the risk of this paper. But the industry looked to attract overseas markets, pension and insurance funds which base their investments upon the risk assessment, so managers at the agencies demanded that these securities be assessed even in the absence of data. With AAA being the safest, AA, A, BBB, BB---so on down to C and lower, with a nod and a wink, the CDOs were rated AAA! How? Why?
If the CDOs were rated according to the financial security of the borrowers, the securities would be rated D or lower. Potential investors would demand high interest rates. In the low to mid-range housing market, home values are precisely determined by interest rate of the loan. High interest rates drive real estate values down. But the market was being fueled by low rates. So long as interest rates were low, the market would boom, prices would soar, more and more units would move, more and more loans would be written. Most of all, the credit rating firms scored commissions on the loans that they rated! If they rated the loans as high-risk, the market would collapse---no loans, no commissions. This is a massive conflict of interest!
At the height of this boom, S&P was making $6 million a month on commissions from these loans, with no risk to themselves. Within the banking community these loans were known as "liar's loans", or "NINJA" loans (no income verification, no job verification, no asset verification). In 2006 alone, IndyMac Bank sold $80 Billion worth of liar's loans. The brokers were moving paper and making commissions on the loans as well. Large financial institutions were buying AAA securities that they believed to be extremely safe. Those in the middle were raking in the dough, with nothing to lose---grab the money while it was coming and be prepared to run. As for the big institutions, there was no reason to think the government wouldn’t bail them out again when the pyramid, a house of cards, collapsed. This was massive white collar fraud, on an international scale.
As this gorging at the public trough, this orgy of greed went on before our eyes, the government stood back and watched the fat cats dance at a “bonfire of the vanities”.
In the absence of information on borrowers, lending institutions turn to credit rating agencies to assess the risk on potential investments. Two of the biggest of these firms are Standard & Poors and Moody’s. The banks, through a process they called "securitization", were pooling large numbers of mortgages into loan packages called mortgage backed securities (MBS). They bunched them loosely into groups, with the sub-prime loans going into groups called collateral debt obligations (CDO). The agencies use statistics for their ratings, however, and since the industry had never before seen a market like this, there were no data upon which to assess the risk of this paper. But the industry looked to attract overseas markets, pension and insurance funds which base their investments upon the risk assessment, so managers at the agencies demanded that these securities be assessed even in the absence of data. With AAA being the safest, AA, A, BBB, BB---so on down to C and lower, with a nod and a wink, the CDOs were rated AAA! How? Why?
If the CDOs were rated according to the financial security of the borrowers, the securities would be rated D or lower. Potential investors would demand high interest rates. In the low to mid-range housing market, home values are precisely determined by interest rate of the loan. High interest rates drive real estate values down. But the market was being fueled by low rates. So long as interest rates were low, the market would boom, prices would soar, more and more units would move, more and more loans would be written. Most of all, the credit rating firms scored commissions on the loans that they rated! If they rated the loans as high-risk, the market would collapse---no loans, no commissions. This is a massive conflict of interest!
At the height of this boom, S&P was making $6 million a month on commissions from these loans, with no risk to themselves. Within the banking community these loans were known as "liar's loans", or "NINJA" loans (no income verification, no job verification, no asset verification). In 2006 alone, IndyMac Bank sold $80 Billion worth of liar's loans. The brokers were moving paper and making commissions on the loans as well. Large financial institutions were buying AAA securities that they believed to be extremely safe. Those in the middle were raking in the dough, with nothing to lose---grab the money while it was coming and be prepared to run. As for the big institutions, there was no reason to think the government wouldn’t bail them out again when the pyramid, a house of cards, collapsed. This was massive white collar fraud, on an international scale.
As this gorging at the public trough, this orgy of greed went on before our eyes, the government stood back and watched the fat cats dance at a “bonfire of the vanities”.
President Bush had removed 500 "watch-dog" agents from the corporate and financial arm of the FBI after 9/11 to "keep us safe" from terror. Even though the agency itself proclaimed that the banking system was headed for a cliff (in 2004), the bureau was emasculated and its warnings were ignored.
And collapse, it did. Detroit, always on the edge, went first and then the entire national home loan structure began to implode. The government "got theirs back" directly as Freddy Mac and Fannie Mae, which guarantee half of the home loans in the country, had to be nationalized. Overseas investment and retirement funds, thinking that United States, AAA securities were the gold standard, were left with fifteen cents on the dollar.
While the bankers were running their own pyramid scheme, insurance companies were not going to be nosed out. Creative financiers were quick to dream up an instrument to fill that bill in an unregulated industry:
The “Credit default swap”. A CDS is a contract guaranteeing the solvency of an entity. It can be used for speculation, especially by someone with inside information. As the health of the entity rises and falls, the value of the contract falls and rises. Prior to 2000 this kind of contract was illegal, but the Commodity Futures Modernization Act was passed in the closing days of the 106th Congress. This dandy little piece allowed people and institutions to gamble on the market without even buying into it. It produced the "Enron Bubble", ultimately was a huge factor in the financial crash of 2008, and allowed financiers with enough savvy to make billions on a very small investment.
“Betting on the boom” seems more like something you go to Lloyds of London for, but it was a quick formula for raking in cash. The downside disaster of an economic crash is mitigated, of course, by the likelihood that the government will step in to save the industry if it comes to that. After all, this industry makes large campaign contributions.
While the bankers were running their own pyramid scheme, insurance companies were not going to be nosed out. Creative financiers were quick to dream up an instrument to fill that bill in an unregulated industry:
The “Credit default swap”. A CDS is a contract guaranteeing the solvency of an entity. It can be used for speculation, especially by someone with inside information. As the health of the entity rises and falls, the value of the contract falls and rises. Prior to 2000 this kind of contract was illegal, but the Commodity Futures Modernization Act was passed in the closing days of the 106th Congress. This dandy little piece allowed people and institutions to gamble on the market without even buying into it. It produced the "Enron Bubble", ultimately was a huge factor in the financial crash of 2008, and allowed financiers with enough savvy to make billions on a very small investment.
“Betting on the boom” seems more like something you go to Lloyds of London for, but it was a quick formula for raking in cash. The downside disaster of an economic crash is mitigated, of course, by the likelihood that the government will step in to save the industry if it comes to that. After all, this industry makes large campaign contributions.
Not to be out-done by their insurance brethren, financiers found innovative instruments to tap the flow of wealth. With assets of $85 Trillion, the true heavyweight of financial markets is the bond market. Comprised largely of government-backed securities from all over the world, the ebb and flow of this market has the potential to send seismic shockwaves through all markets. In order to protect itself from these forces, the market devised “hedge funds”. A hedge fund is the stock market equivalent of the futures market for commodities.
Robert Merton and Myron Scholes, of Long Term Capital Management, devised a formula for calculating the price for such options, and their model predicted only an extremely remote possibility of collapse. The funds, after all, “hedged” their investors’ bets. For this Merton and Scholes received the Nobel Prize for Economics in 1997. LTCM lost $4.6 Billion in 1998, four months after a financial crisis in Russia. Assistance from the financial community prevented this collapse from spreading, however, and allowed these practices to continue in the industry.
Among other dubious practices in this market we find:
● “Derivatives”. This “investment” is a contract for an option to buy an instrument at a future time for a given price. Since it varies with the rate of return on a separate financial instrument, it “derives” its value from the other. (A derivative is a mathematical concept designed to express a variable in terms of another dimension, such as acceleration as a derivative of speed. Got it?) By 2008 there were $596 Trillion on the world derivative markets, a staggering 43 times the size of the U.S. economy.
Robert Merton and Myron Scholes, of Long Term Capital Management, devised a formula for calculating the price for such options, and their model predicted only an extremely remote possibility of collapse. The funds, after all, “hedged” their investors’ bets. For this Merton and Scholes received the Nobel Prize for Economics in 1997. LTCM lost $4.6 Billion in 1998, four months after a financial crisis in Russia. Assistance from the financial community prevented this collapse from spreading, however, and allowed these practices to continue in the industry.
Among other dubious practices in this market we find:
● “Derivatives”. This “investment” is a contract for an option to buy an instrument at a future time for a given price. Since it varies with the rate of return on a separate financial instrument, it “derives” its value from the other. (A derivative is a mathematical concept designed to express a variable in terms of another dimension, such as acceleration as a derivative of speed. Got it?) By 2008 there were $596 Trillion on the world derivative markets, a staggering 43 times the size of the U.S. economy.
There's a case for derviatives among prudent investors. A home buyer could hedge the value of his $300,000 home by buying a $350,000 derivative contract related to the home price index that would protect him from falling values. Such a contract would, however, be money wasted in a bull real estate market. As such, the product does not now exist---there's no market for it. The market is dominated by fat cats looking for a kill.
● “Synthetic collateralized debt obligations” allow investors to tap into the profits from insurance on the CDS pools. These instruments, in theory, made credit more available, but in practice they created a dense web of international entanglements of impenetrable confusion. The lack of transparency and compliant ratings agencies allowed securities firms to conceal risks so thoroughly that even sophisticated investors were surprised by the poor quality of the assets they had gambled on.
In case you can’t understand these descriptions, neither could the large investors purchasing them, the emasculated regulators supposedly overseeing them or the mop-up crew that’s trying to unravel this mess. But that was the point: lack of transparency in the industry. Does this sound like “investing”? No these are risk ventures, gambling. And who’s being placed at risk here? Not the firms devising all this mumbo-jumbo. The top people in the industry knew it was “too big to allow failure”. The CEOs of these investment firms were bringing in a $ Billion per year, and putting it in safe harbor. And where did the money come from? Much came from overseas. It came from small investors through retirement and insurance funds---from people who hadn’t a clue what was happening to their money, what risk they were facing and who was accountable. Much was being filtered from the staggering sums thrown into the economy by the government budget deficit. Who pays? We all pay immediately through this economic downturn, next through inflation, and ultimately our children and grandchildren pay what’s left from the “fruits” of their parents’ folly and greed.
A small number of individuals in these firms have been making staggeringly high sums, filtering commissions, profits and stock options, leaving the rest of us holding the bag, as in any pyramid scheme. They have been aware of the fine line that the industry was walking; but in our business culture, managers only look a year or two ahead. If they could hold it together for only that long, they’d pocket enormous salaries and bail when the economy went south. With a couple hundred million dollars in their private accounts, what do they care about these faceless institutions?
If these people were caught as cat burglars, stealing your assets by breaking into your home, they’d go straight to jail. But as “white collar” criminals, stealing your assets through bogus financial instruments, they get wealth with impunity. This is all made possible by lax regulation and by direct payments from the industry into our political system.
Are they responsible? Yes, but will they be held accountable? You might round up a thousand principals who were pocketing fifty million to a billion dollars over the past five years; each would have to be tried individually for culpability [in a giant embezzlement scheme]. Could the money be recovered? Not enough to make a dent in the losses of the masses, but perhaps enough to get the attention of future white collar criminals. The political cost of redress in this matter would be off the charts.
So are the principals behind this mess stupid? Hell, no. They're opportunists, feeding in at the public trough. The great majority are right-wingers who deify “capitalism” while they vilify “communism” (whatever that is), socialism, as a scourge. They rage over the evils of “welfare” (for the poor). Welfare for the rich? That’s perfectly ok. We privatize profits, but socialize risk. The assurance of government bailout (welfare for the rich) is what propelled this financial mess. The sickness that our economy faces is gout; it’s an illness of gluttony, greed. The poor will absorb the lion’s share of hardship. The poor lose their jobs, homes, health and families. Inflation generated by this mountain of debt will hit the poor with full fury. The bankers and the rich keep bobbing to the surface, only to dream up the next scheme, and to again decry the evils of welfare. Ma and Pa in Middle America (“good, hard-working folks”) buy into it. The last great depression went on for 10 years, and was at last ended by terrible war. We’ll see what has changed if/after this mess is cleaned up. Any bets?
In case you can’t understand these descriptions, neither could the large investors purchasing them, the emasculated regulators supposedly overseeing them or the mop-up crew that’s trying to unravel this mess. But that was the point: lack of transparency in the industry. Does this sound like “investing”? No these are risk ventures, gambling. And who’s being placed at risk here? Not the firms devising all this mumbo-jumbo. The top people in the industry knew it was “too big to allow failure”. The CEOs of these investment firms were bringing in a $ Billion per year, and putting it in safe harbor. And where did the money come from? Much came from overseas. It came from small investors through retirement and insurance funds---from people who hadn’t a clue what was happening to their money, what risk they were facing and who was accountable. Much was being filtered from the staggering sums thrown into the economy by the government budget deficit. Who pays? We all pay immediately through this economic downturn, next through inflation, and ultimately our children and grandchildren pay what’s left from the “fruits” of their parents’ folly and greed.
A small number of individuals in these firms have been making staggeringly high sums, filtering commissions, profits and stock options, leaving the rest of us holding the bag, as in any pyramid scheme. They have been aware of the fine line that the industry was walking; but in our business culture, managers only look a year or two ahead. If they could hold it together for only that long, they’d pocket enormous salaries and bail when the economy went south. With a couple hundred million dollars in their private accounts, what do they care about these faceless institutions?
If these people were caught as cat burglars, stealing your assets by breaking into your home, they’d go straight to jail. But as “white collar” criminals, stealing your assets through bogus financial instruments, they get wealth with impunity. This is all made possible by lax regulation and by direct payments from the industry into our political system.
Are they responsible? Yes, but will they be held accountable? You might round up a thousand principals who were pocketing fifty million to a billion dollars over the past five years; each would have to be tried individually for culpability [in a giant embezzlement scheme]. Could the money be recovered? Not enough to make a dent in the losses of the masses, but perhaps enough to get the attention of future white collar criminals. The political cost of redress in this matter would be off the charts.
So are the principals behind this mess stupid? Hell, no. They're opportunists, feeding in at the public trough. The great majority are right-wingers who deify “capitalism” while they vilify “communism” (whatever that is), socialism, as a scourge. They rage over the evils of “welfare” (for the poor). Welfare for the rich? That’s perfectly ok. We privatize profits, but socialize risk. The assurance of government bailout (welfare for the rich) is what propelled this financial mess. The sickness that our economy faces is gout; it’s an illness of gluttony, greed. The poor will absorb the lion’s share of hardship. The poor lose their jobs, homes, health and families. Inflation generated by this mountain of debt will hit the poor with full fury. The bankers and the rich keep bobbing to the surface, only to dream up the next scheme, and to again decry the evils of welfare. Ma and Pa in Middle America (“good, hard-working folks”) buy into it. The last great depression went on for 10 years, and was at last ended by terrible war. We’ll see what has changed if/after this mess is cleaned up. Any bets?
Jackson Dave is a staff writer for Robbinsense jacksondave.rsense@gmail.com
