Dec 10, 2008
How we got here? Simple:
- The Clinton administration passed the Financial Services Modernization Act, eliminating New Deal barriers against mergers of commercial and investment banks.1
- The Clinton administration passed the Commodity Futures Modernization Act, which banned government regulation of the new derivatives market.1
- The commercial side of the newly merged banks lured millions of first-time home buyers with mortgages whose initial terms were too enticing to resist, knowing their investment side would re-package and re-sell the mortgages in derivative bundles, eliminating risk to the original lender.
- While housing values increased, banks around the world rushed to purchase these derivatives, without understanding them or the risks involved, heeding only the apparent increases in their value. They borrowed money to purchase these derivatives, often as much as $30 for every dollar they put up of their own.
- Bankers were able to show huge short-term “book” profits from these derivative sales, earning themselves gigantic bonuses.
- Housing values leveled off at the same time the rosy mortgage terms expired, and people who should never have qualified for mortgages suddenly found themselves unable to pay them.
- Those derivatives purchased by banks around the world, on borrowed money, lost their value, often ruining the banks (Washington Mutual and others), crippling the largest financial institutions in the country and around the world, and, oh yes, incidentally sending millions of homeowners into foreclosure and out onto the streets.
Then came the financial bailout, which put cash back into the banks, and which the investment side would not allow the commercial side to lend, causing the credit crunch (still unresolved, as no requirement that they should actually do anything with the money was made of the banks receiving the $750 billion in taxpayer bailout funds).
Where we’re going? Not so easy to say:
- We’ve stopped spending, we know that. November, including Black Friday, totted up the lowest sales in 30 years.2
- Jobs are dropping like flies. Not since December 1974 (Nixon was president!) have we lost more jobs than we did in November (533,000).3
- Being a consumer society and one which has dropped manufacturing jobs in favor of service jobs, those first two numbers do not bode well for the future. If we don’t spend, we don’t work.
- This graphic from the Bureau of Labor Statistics is a little scary. Note the increasing rate of decline in employment during this recession, and note how long it took during the last recession in 2001 for employment figures to get back to the pre-recession level (three+ years).
What brings us out of recessions? Typically, wars or large infusions of government spending matched with tax cuts. With an over ten-trillion-dollar deficit (four trillion of which was added by the Bush administration), more trillions in bailout commitments made and commitments to come which have so far shown little effect on the economy, and no end in sight to two ruinously expensive wars, how much further in the hole can we expect our government to go before the underlying strength of our economy suffers serious and lasting damage? Hopefully, a good bit further, as there is really no alternative in sight.
Let us not forget how we got here—through an unholy alliance of our federal government and narrow corporate interests consumed with greed. We have yet to bring either to account. We have yet to elect representatives who have pledged to do so. Hope is not enough.
1 Change We Can Bank On,
by Robert Scheer, from Truthdig.com, November 18, 2008, accessed December 6, 2008.
2 November retail sales are worst in 30 years,
by Jayne O'Donnell, from USA Today, undated, accessed December 6, 2008.
3 U.S. Loses 533,000 Jobs in Biggest Drop since 1974,
by Louis Uchitelle, from the New York Times, December 5, 2008, accessed December 6, 2008.