Finance and Economics: The Still-too-Secret World of Greed

Finance and Economics: The Still-too-Secret World of Greed

After the financial disaster of 2008, economists, financial experts and writers on such topics tried to explain and take lessons from it. Many are still trying, with mixed success. Here is a sampling from a library’s bookshelves, copyright dates from 2010 to 2015. Each of them has purpose and an approach; each differs, but all agree that there is a great deal wrong with Capitalism and Democracy that needs to be fixed. And, they do agree on one thing: control, rather than another “free market” debacle is preferable, but as of today, too little has been done.

In the US, the 2016 Presidential elections provide an interesting perspective on how the public perceives this continuing problem—or rather, knows it exists but does not comprehend how important public policy is to its resolution. The struggle between the “haves” and “have-nots” continues, but those most angry seem to be divided between the two parties, for differing reasons. Republican primary voters (less than 15% of GOP voters) have selected as its candidate a non-politician, Donald Trump. because “they have lost confidence in the party ‘establishment’ to stop the erosion of the middle class, to provide more stability for families, and to cut back on the role of government in their lives”—a conservative view.
The Democratic primary voters have all but decided on an “establishment” candidate –Hillary Clinton–but have also shown strong support for a “protest” candidate—a former Socialist, who appeals to a strong minority comprising young people and angry, disappointed, anti-status quo liberal voters. The fact that a woman will be a Presidential candidate for the first time, (and there is an issue of equality of women—pay and other factors) complicates the election, but the basics remain: should economic inequality be permitted to increase between the very wealthy 5-10% and the other 90%, and if not, how can it be reversed.

Neither party’s candidate seems willing, as yet, to directly address the issues described in the books on finance and the world economy that I summarize briefly below. That is: how can societies and governments effectively control the economic and financial institutions that operate within and beyond them to eliminate or minimize the disruption of national and the world economy.

What IS clear, however, is that there are valid reasons why the MUST be done, that there is no agreement on how, though there are clear ways to minimize them and deal with those responsible, IF governments can agree upon them. HOW, who loses and gains from changes in the present controls, and WHO shall DO it, are all major sticking points.
In the books below are descriptions of unbelievable incompetence, clear criminality, lack of awareness of responsibility, and an unwillingness to make difficult decisions when decisions are necessary. But most of all, they show how complex are the activities of banks, financial institutions, in the pursuit of wealth, the “monetization” of assets and the vast variety of ways of “getting a piece of the action” when large amounts of money involving the entitlement to underlying assets permits their use in profit-making exchanges. If that sentence seems convoluted, it is simple when compared with some of the millions of transactions conducted daily, worldwide.

Some of the address the issue of whether or not capitalism and democracy are indivisible, and whether one can exist without the other. The consensus seems to be that “it’s possible, but only when the concept of “freedom” is expanded in some ways, but restricted in others—that appears to be that if “greed” can be defined and controlled, and the greedy eliminated from the planning and execution of financial activity, the answer is yes. This of course would involve social justice, a new definition of “equality of opportunity,” and most of all, a way of enforcing adherence to the laws and regulations that make these goals possible.
In the election of 2016 for President of the United States, this issue will not be directly on the agenda, but it will be implicit. Whether Trump or Clinton can mollify or satisfy those who clamor for change will determine how soon or later it will surface more clearly in the political discourse. If Clinton selects Sanders, a socialist-oriented politician, as her Vice-Presidential running mate, it will significantly clarify some of the issues, and how the world’s largest economy will be addressing them. If not, it is possible that Trump could “pre-empt’ the Democrats social justice plank to some extent, taking from her some of the traditional Democrat support on this issue.

The Globalization of Inequality. Princeton U. Press: Princeton (Burguinon, Frsncois) 2015.
For two centuries the world economy has raised the living standards of millions of people. There has been an increase in many, but not all, of the world’s nations. Along with it has been the reduction of inequality among the developed nations. However, there is a growing inequality WITHIN some of these nations, between the poorest and the wealthiest. (Note: in the US, over the past 30 years the income of the top .1% grew by 700%. At the same time, the average income of Americans has not increased at all, though for the top 20% income grew 60%, but everyone else (80%) is paid 10% LESS.–Source, NY Times (P. Krugman) 8-23-09).
How this can be remedied within the context of Capitalist Democracy is considered very difficult. Nations where this is happening, however, will, as in the US, experience increasing political unrest, unless protests can be suppressed or otherwise minimized by a less market-oriented and more social fairness policy.

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. Penguin Press: NY (Blinder, Alan S) 2013.
The dust cover describes Blinder as “one of our wisest and most clear-eyed economic thinkers.” He “offers a masterful narrative of the crisis (beginning in 2007) and its lessons.”
Blinder says, “It took the crisis for the world to discover how truly interconnected–and fragile—the global financial system is.” He argues that the problem started in the United States and spread abroad (other writers agree). “It spread to the hungry world.” (read: needy/greedy, or both) He explains how other governments and the US intervened. (read: bailed out and/or reorganized) the financial world to prevent total meltdown of financial institutions. Though the worst did not happen, he says, unless the best of the difficult choices ahead are made, it could happen again. He then looks ahead with a listing of lessons learned and some “financial commandments” which the world will violate at its financial peril.

The Crash of 2016: The Plot to Destroy America and What We Can Do To Stop It. Twelve—HatchettBookGroup. NY (Hartmann, Thom) 2013.
“The pillars of democracy that supported a middle class have been corrupted,” says the dust cover. Hartmann points to the rotten core where corporate and billionaire power and greed have replaced democratic infrastructure and governance…to ensure the success of only a fraction of the population at the expense of the rest of us. The result, he says, is a “for the rich, by the rich” scheme leading to policies that benefit only the highest bidder.”
Hartmann calls the corrupt “elite” “economic royalists” (FDR’s term) who for over 40 years have followed a plan coordinated by The US Chamber of Commerce and others that will destroy democracy and plunge our nation into economic chaos and social instability. (Note: His predictions have not all been accurate—but perhaps he has described the outcome of the election of November, 2016—yet to come.)

The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019. Portfolio/Penguin. NY (Dent, Harry S. Jr.) 2014
Dent is an economic forecaster whose good reputation has been based on past success for his clients and readers of his books and newsletter. The “great deflation,” however, seems to have been on hold until now (mid-2016), Still, there has been no inflation by indicate that he was half-right, not half wrong. However, his prediction of a Dow Jones Average of 5,800 by 2015 seems to be a long way off (May, 2016 it is at 17,500)
Many of his suggested strategies work in all financial climates.–other than sell off all stocks and them wait to buy them back. His suggestion to business that it become “mean and lean” to save money works anytime. Families should be cautious about buying housing is reasonable. Finally, he recommends that government stop the stimulus (he calls it QE—quantitative easing). That however, seems premature since it is clearly still needed to keep the country from “going over the cliff.”

How the West was Lost: Fifty years of Economic Folly—and the Stark Choices Ahead. Farrar, Straus and Geroux. NY (Moyo, Danbisa) 2011.
This book describes “how America’s rapidly growing population of the unskilled, unemployed, and disaffected threatens the nation’s wealth and stature. So says the author. The sub-title is one of the conclusions drawn by Moyo, an investment banker and former consultant to the World Bank. Some other conclusions are: a return to market-based economics will risk increasing income inequality in developed countries (like the US). Capital has been badly mus-allocated is another. And, the US is losing its status as the source of innovation in technology. Although many questions remain, all is not lost—IF–the Western mindset is changed from ravenous consumption and coordinates the three essentials of growth (capital, labor, and technology) it could avoid becoming another “welfare state.” How? The author suggests a counter-intuitive remedy, moving to a “well-engineered and designed” and self-financed socialist state. But debt levels, low growth (2011), and the inertia and drag of stagnating politics make the future of the US, and the West, uncertain.

Boomerang: Travels in the New Third World. W.W. Norton and Co. NY (Lewis, Michael). 2011.
Lewis is the author of best-selling books like The Big Short, and The Blind Side, as well as many others on finance and economics. He has a “merciless eye” which he turned on the bursting of financial bubbles in Iceland, Greece, Ireland, Germany and finally, California. He writes with amazement about how the financial leaders—bankers, financiers, corporations and fund managers, and of course, the public—and taxpayers, who ultimately have been the victims, but also the source of whatever rescues were devised.
Lewis begins by describing one of the few US investors who made their fortunes in the sub-prime mortgage market (credit default swaps) before it collapsed. Those few bet against the price of a bond, (shorted it) though not needing to own the underlying assets, insuring against the failure of bonds that they did not own.
The banks loaned trillions in money that they never could recover from these bad loans backed by sub-prime mortgages (that were rated by S&P and others as AAA). Of course, no one believed that the Banks could fail; they were too big. And yet they did.
The threat to the national economies of the nations in which these banks did business by multiple bank failures was never taken seriously. That, as this collapse has shown, was a mistake. In fact, the default did happen and the only alternative was government intervention and bailouts. Who, ultimately pays—why government treasuries, of course. The bursting of the “big bubble’” claimed Lehman Brothers, and caused TARP, which kept Insurers like AIG and others from failure and avoided the catastrophe of multiple failures of our “too-big-to-fail” banks and financial institutions. In 2016, the recovery is still not complete. Permitting banks to speculate with depositors’ funds, by repealing the Glass-Steagel Act, made the collapse possible, and a new law, Dodd-Frank, was passed to try to prevent recurrence. Already, though, Wall Street is nibbling the law as their lobbyists try to get a too-compliant Congress to pressure Regulators and pass “revisions” that “free up” bank deposits—with some, limited success at preventing some restraints by this writing.
Lewis writes amusingly, and for good reason. The basic facts are too grim and depressing to be read without a sense of anger and betrayal toward Wall Street, bankers, regulators and the Congress who permitted the loss of trillions of dollars. What happened in the US was terrible, but default and total collapse of the economy was averted, at great cost to almost everyone, but most of all taxpayers.
He quotes a UN official who said, “You have to understand, Iceland is no longer a country. It’s a hedge fund.” He describes how about 40 bankers and financiers caused $100 billion in losses ($330,000 for every man, woman and child in Iceland). This does NOT include the billions in personal debt that is still being paid. Lewis describes hearing frequent explosions that he was told were SUVs owned by debt-ridden, who torched them for the insurance. (Note: only the size of the US made it possible to fund the TARP bailout—that debt is still ours. Icelanders debt amounted to 850% of GDP, while the US’s is just 350%.)
Read the book. You will learn much about world finance, but even more, that if you aren’t worried, you should be. A final story: A hedge fund manager told Lewis how Icelandic banking works (or worked). “You have a dog and I have a cat. We agree, each is worth a billion dollars. You sell me the dog for a billion and I sell you the cat for a billion. Now, we are no longer pet owners but Icelandic bankers with a billion dollars in new assets (to loan against).” (p. 17) FYI, this is how, in the US, the banks and investment companies (trading worthless assets) grew, and grew until someone wanted real money for their investments. By then, insurance was not enough.
In the last chapter Lewis describes California and the city of Vallejo, where the local government can no longer pay for the services needed by its citizens, and everything, business, property values and commerce have collapsed. It CAN happen here, and it did.

I.O.U. Why Everyone Owes Everyone Else and No One Can Pay. Simon and Schuster, NY (Lanchester, John) 2010.
Writing in 2010, soon after the collapse in Britain and much of the world’s economies, Lanchester describes “how the decisions and actions of a selected group of individuals had profound consequences for America, Europe and the global economy overall.” He says, the “seemingly magical proliferation of cheap credit that led to an explosion of lending…the widespread use of financial instruments and the… (ultimate worthlessness) of sub-prime mortgages which was the fake collateral on which “credit default swaps” were based were the reasons for the collapse of the market.
Like Michael Lewis, John Lanchester realizes that only with bemused detachment “can this be digested without rage by most readers.” He says, “these collapses are not likely to be the last. In Britain, as in many other countries (like the US) there is “a huge level of personal debt arising (from the credit bubble’s collapse).”
In 2016, there is more stability, and some of the debt has been added to the nations’ “national debt (we ALL owe it now, whether we incurred it or not). Lanchester asks, “should the government continue to bail out too-big-to-fail banks and let the nation pay, (not a good solution because most governments are even worse bankers), or let the banks fail and destroy the nations’ economies? A third solution is to “control the banks tightly so that this cannot happen.”
Clearly, that banks and financial institutions function badly and sometimes dishonestly is no longer a secret. The Dodd-Frank Act, by itself, is an inadequate remedy that is being dissected piece by piece by the Wall Street and big banking lobbies. If there is to be adequate protection, it will have to come from better and stronger legislation passed by Congress and quickly turned into regulations by the agencies responsible (who have a major responsibility for the problems of the past decade because of lax enforcement of the inadequate laws already on the books).
Will this happen? Neither Hillary Clinton or Donald Trump—the likely 2016 Presidential nominees are the most highly-regarded critics of our Wall Street and Banking establishments. However, Clinton can do better by choosing Bernie Sanders as her Vice-Presidential running mate. This should help “hold at bay the most vociferously greedy of our so-called Capitalist-Democrats” while better controls are put in place. This will be slowed, however, unless a “better” Congress than the present membership returns for the 2017 sessions.
The US has an angry, confused, and largely uninformed public, that is probably incapable of comprehending the seriousness of the nation’s financial situation. The choices in November are not encouraging for much improvement in the caliber of the nation’s politicians. If there is anything to the idea that America is a blessed and fortunate nation, let’s hope, and let the devout pray, that it is true, whether or not we might deserve it.

John H. Langer, JD, Ed.D. Retired Federal agency manger, former professor of education, public school administrator, and writer of a number of articles and publications on education, public affairs, substance abuse and social issues. In writing a book on attention and memory as it relates to education, this blog is helping to focus attention n current issues, and hopefully, add something useful as well.

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