"Looting of America" Author Sees Opportunity in Meltdown

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By David Swanson (about the author) Page 4 of 10 page(s)

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We were a millisecond away from that massive meltdown, and, you know, whatever criticisms I may have of how it was done and what, you know, the various administrations were up to, the Bush administration in the end, had they not acted on AIG, we'd be selling pencils on the street right now. It would be a disaster. Bank after bank after bank after bank would have folded.

DS: And not just banks but school districts and pension funds, and . . .

LL: Oh, all kinds, everybody that took out insurance would now be insolvent or close to being insolvent. You would have had a massive crash. I mean, it was bad enough as it is, but it would have been, I think, by a factor of ten times worse. JP Morgan would have gone under, I believe. You know, a lot of the other Wall Street firms would have gone under because they were counting on that insurance. Uh, anyway, so . .

DS: And this would have impacted real people in the real economy.

LL: That's another thing I think that needs to be better understood. People kind of view the finance community as another sector. It's not another sector. It's the kind of the heart and lungs of the economy. It breathes. It's everywhere. Uh, virtually every single financial institution, school district even, rely on financing, on a periodic basis or on a daily basis. Every aspect of the economy relies on . . . The way I like to picture it is, imagine the globe. On the surface of the globe is real production. The air is finance. You need a certain, you need the right amount of air for the real economy on the surface of the globe to prosper, and if the air gets too thin or it gets too stormy, you have, all hell breaks loose on the surface of the globe.

And what happened was, once these institutions started to fail and the values started to crash and these fantasy finance instruments that were, you know, based on not much more than fantasy baseball, once the crash took place, the strike took place, as it were, you had an implosion of credit problems. Banks were afraid to lend to each other, for starters, because, think about it. They knew how much toxic, how many toxic assets they had on their books. They knew every other bank had toxic assets on their books, and they knew how close they were to going under. They're not going to give money to another bank that is also about to go under. They needed their own capital to be able to stay solvent. So bank after bank after bank after bank held onto their money.

The money market funds froze up. And money market funds are absolutely invaluable because that's what corporations use to make payroll. They depend on selling paper for 30 or overnight or for 30 days and then rolling it again and again and again. They use that money to make payroll and they use their earnings for higher return investments in their company and elsewhere.

So all of that started to freeze up. And once the credit system freezes up, the economy, when they talk about the economy falling off the cliff, that's what happens. It just stops functioning. It starts sputtering. People can't get credit to buy things. Companies can't get credit to buy things. Then the people that are waiting to sell things can't sell them. They start laying off people. Everybody starts laying off people. Everybody stops buying things as well, and you get a downward spiral, a deflationary spiral.

This is what happened after 1929, after the crash then, and it was mismanaged as well at that time by the federal government in the Hoover administration, or so the literature suggests. But anyway, once that credit freeze starts going into the real economy, you get a dramatic, instantaneous recession. I mean GM and the Big Three auto companies would have problems anyway, but nothing like what they are facing now. I mean Toyota, everybody is seeing, witnessing a humongous drop in sales. That's not because all of a sudden people got poor. It's because the credit system froze up. And when it freezes the entire economy in a sense comes to a halt just long enough to cause chaos, and it's happening on a global level. Virtually no country is immune.

DS: And I think we should make clear, as your book does, I think, if I'm reading it right, that the world of finance out there in the atmosphere doesn't just impact the real world and the real economy when and if it collapses, but is for better and worse and often for worse interacting with the real economy all along and in many ways driving us to the cliff that we then are in the position of being about to fall off. And so, in regards to the housing market that you suggested was central to this, and you said that the housing market hit a limit. It was interesting in reading your book and others that in some ways the housing market was driven to that limit by the world of finance.

So, you know, I used to work with a community group called ACORN, and we would try to prevent predatory loans, and eventually we got to the point of trying to hold accountable the companies that were buying the predatory loans, and so I sort of viewed it from that direction, in that sequence, and yet in some ways it may have gone the other way – that the people throwing all this money around to buy these securitized packages of reshaped predatory loans were driving the creation of more and more and more of these subprime loans out there.

LL: You're absolutely right. Think about it this way. Very interesting phenomenon occurred. Remember we talked about the productivity kept going up and wages didn't go up?

DS: Yeah.

LL: Well, the response, both of the financial community and by the average consumer, was to take on more debt. The average ratio up until the splitting of the two lines was about 60 cents on the dollar. Every dollar you earned, on average, people had about 60 cents in debt. Well, as wages stopped going up and some of this fabulous wealth of the super rich got recycled back to consumers in the form of debt - credit card debt, mortgage debt, car loans, student loans, on and on and on. Well, the ratio went from 60 cents on a dollar to $1.20 per dollar! It doubled. Virtually the debt load on the average consumer doubled.

DS: Borrowing what we had earned had our pay been based on productivity.

LL: Well, there's a limit to how much debt a consumer can take on. There's just a limit. You know, at some point you can't service the debt. And that means if your indebtedness was driving up, let's say, the housing market, and everybody was thinking, "Well, if I get into trouble, prices are going up, I'll sell my house and I'll still be able to pay off my debt," at some point it isn't going to work any more. I mean, it's obvious it wasn't going to work anymore.

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David Swanson is the author of the upcoming book "Daybreak: Undoing the Imperial Presidency and Forming a More Perfect Union" by Seven Stories Press and of the introduction to "The 35 Articles of Impeachment and the Case for Prosecuting George W. (more...)

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