I never thought I would set out to write about economic policy. In the absence of formal training, venturing into what has been called “the dismal science” has seemed best left to the experts. Yet ,while today the Bush administration continues to crow about a robust economy, the potentially calamitous housing market bubble suggests the United States arguably faces a recession at least and a full-blown depression at worst. It’s time we laypeople took note of what the self proclaimed experts have really been up to.We are all involved in “the economy,” of course, yet for most of us our knowledge about how it works is limited to the aforementioned self-serving sound bites and stock market quotes. Market up, good; market down, bad. We know the oil the stock market runs on is confidence, and that once this fickle factor turns south things can quickly snowball.
We should be forgiven for being suspicious of the rosy picture continually painted for us by Wall Street's financial engineers. Although national productivity rates are up and corporate profits at record highs, those of us on Main Street are feeling the pain of rampant outsourcing, lousy pay, ruinous education and health costs, crumbling public infrastructure, and decaying factories and farms.
While we’ve learned good news from Wall Street often loses something in the translation to our lives, neither can we afford to ignore its periodic systemic failures. Like most of us I suspect, I grew up thinking the Great Depression of the 1930s was some kind of natural disaster, akin to the widespread drought that occurred at the same time. In fact, increasingly risky and foolhardy market speculation played a huge role, as shares were routinely over-inflated to false levels by inside traders and conflicts of interest between interlinked corporations. Virtually the entire economy was one interrelated bubble, which defied gravity itself before inevitably bursting.
The New Deal response by the government of Franklin Roosevelt included market regulations that eliminated some of the shakier deal-making that had cleaned out so many innocent people. Notable was the Glass-Steagall Banking Act of 1933 which mandated a barrier between commercial and investment banks to prevent incestuous buying and selling between these two powerful institutions.
Today, some 30 years into a regime of market deregulation advocated by Milton Friedman and like-minded economists at the University of Chicago, speculators are once again at play in a fool’s paradise. Glass-Steagall, at first simply un-enforced by both Republican and Democratic administrations in the name of market “freedom,” was finally repealed outright in 1999 with the approval of Bill Clinton. With the neutering of the Securities and Exchange Commission in its market oversight duties, the string of disastrous Wall Street scandals – Savings and Loan, Enron, Long Term Capital Management – featuring household names like Citigroup, JP Morgan Chase, Merrill Lynch, Morgan Stanley, etc., has grown too long to list.
Much of what passes for business on Wall Street today is the exact opposite of productive contribution to the economy. All the rage, so-called hedge funds operate on a ruthlessly straightforward strategy. First, the leveraged hostile takeover of a company, followed by a quick hollowing out process (often through worker layoffs or the sale of equipment and infrastructure) and finally the eventual resale (“flipping”) of the now-gutted company. At every stage, hefty fees are paid to middlemen for dubious "services." Like the now infamous sub-prime mortgage industry, hedge funds were harmless to the greater economy as long as their volume remained relatively small, yet hedge funds and similarly-operating private equity firms now generate a third to a half of Wall Street’s business.
Once again we have a bubble economy, and once again, the pop approacheth: the value of hedge fund takeovers has dropped from $695 billion this past April to $222 billion in August. The U.S. sub-prime housing crisis is not expected to peak until 2009 and total defaults could reach $150 billion, according to rating agency Standard and Poor’s.
The rats are beginning to peer over the gunwales, and when ships this size start going down, it’s the taxpayers who are handed the bail bucket. The collapse of the mismanaged savings and loan industry way back in the 1980s is still sending ripples and could cost U.S. taxpayers over $500 BILLION dollars before it’s all paid off.
Current conditions should lead us to an honest public discussion about reinstituting a managed economy. You may have to search, but hearings held by Congressman Barney Frank’s House Financial Services Committee should be enlightening on this topic. Who knows? You may even gain an appreciation for the Dismal Science.