Financial crises are a lot like childbirth -- they both involve a lot of pain and end up costing you a lot of money. But, after a while, you forget about all the negatives and are ready to do it again. Of course, with childbirth you at least get something positive out of it. In my own case, I'd forgotten enough about the downside of having a baby to do it again two years later -- without an epidural. (My older daughter just graduated from college this week -- time flies!) This propensity to forget, so useful when it comes to having babies, is incredibly destructive when it comes to our economy. So why do we do it?
In 1990, John Kenneth Galbraith tried to answer this vexing question in his book, A Short History of Financial Euphoria. Using the 1987 market crash as his launch pad, Galbraith looks at the history of financial bubbles -- and the subsequent and inevitable crashes -- and at why the lessons that would prevent boom and bust cycles from happening with devastating regularity are never learned. To Galbraith it's a combination of "the extreme brevity of the financial memory" and a general ignorance of history.
"There can be few fields of human endeavor in which history counts for so little as in the world of finance," he writes. "Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present."
And not only is the boom and bust cycle repeated endlessly, so is the response. See if this sounds familiar: When the initial wave of public anger at a financial bubble bursting is at its highest, there are pledges from politicians to get tough and "never let this happen again." Some reforms are proposed but, as the public's anger -- and memory -- weakens, so does the "reform." By the time reform measures are passed (if they even are), lobbying has weakened them enough to make another crisis inevitable. In fact, that's how these measures are designed -- not with the intent of creating a fresh crisis per se, but by providing loopholes that explicitly allow the activities that will make the next crisis inevitable.
Exhibit A: The renewed battle over the so-called Volcker Rule in response to JPMorgan Chase's recent trading loss -- which might reach $5 billion. How did such a massive misstep happen? We want to think there must be some extraordinary reason for such an extraordinary loss. Was it because of a change in JPMorgan's risk model, which hid the true extent of risk the bank was taking on? Was it because of the personnel conflicts brought on by the vacuum created when Ina Drew, head of JPMorgan's chief investment office, came down with Lyme disease in 2010? Or was it, in fact, inevitable because "of a loophole in the reform legislation that Obama signed"?
In any case, it was no doubt helped along by the "extreme brevity of the financial memory." Right now the question is whether the small-bore outrage over the JPMorgan debacle will help the small-bore reform -- in the form of the Volcker Rule -- inch across the finish line in some more-than-meaningless form. But it's also useful to go back a bit, into Galbraith's "primitive refuge" of "past experience." Let's go back to 2008. It's not that long ago, but it has the feel of a distant memory when you recall the level of outrage directed at big banks at the time, and the kind of real reform that, for a minute or two, seemed possible. There were serious proposals to transform the way big banks do business, and to ensure that taxpayers would never again have to step in to pay the tab after another Wall Street bender. There was a lot of tough talk from the new Obama administration, which, if it was willing to do more than talk, had the public's will -- and outrage -- behind it.
But as the banks and their lobbyists surely knew, the devil is in the details. So, as the public began to forget its outrage, the lobbyists began to get to work. First, the most meaningful proposals, like bringing back Glass-Steagall, or getting rid of too-big-to-fail banks by breaking them up, were tossed aside. What was left became the Dodd-Frank bill, passed in the summer of 2010. In the year following the bill's passage, over two-dozen pieces of legislation were put into the mix to weaken it.
According to Public Citizen, members of Congress who support a weakened version of the rule raked in 35 times more in contributions from the financial industry than those who support a strong version -- $66.7 million to $1.9 million. And as lobbying intensified this spring, lawmakers were, as Bloomberg News put it, "signaling they're receptive" to revising the rule. Sounds like something out of a nature documentary -- modern democracy's equivalent of wild animals signaling they're receptive by lifting their behinds.
And now comes the JPMorgan trading loss -- exactly the kind of thing the Volcker Rule is supposed to prevent. "JPMorgan Chase has a big hedge fund inside a commercial bank," said Boston University economics professor Mark Williams. "They should be taking in deposits and making loans, not taking large speculative bets." Or, as Felix Salmon put it, the bank was "using its Chief Investment Office to gamble with taxpayer-backstopped funds." Once again, the taxpayer is the ATM at the Wall Street casino -- exactly what all the politicians, responding to our outrage in 2008 and 2009, were never going to let happen again.
And, once again, we're hearing the tough talk. "We are very confident that we will be able to make sure [the new rules] come out as tough and effective as they need to be and I think this episode helps to make that case," said Treasury Secretary Tim Geithner.
"Without Wall Street reform, we could have found ourselves with the taxpayers once again on the hook for Wall Street's mistakes," said President Obama. "We've got to finish the job of implementing this reform and putting these rules in place."
Could have? And finish the job? It's not like the loophole-ridden Volcker Rule will end too-big-to-fail -- and as long as that's the case, the banks know they have us right where they want us. And the president didn't mention anything about finishing the job a few days earlier when he appeared on The View and declared that "JPMorgan is one of the best-managed banks there is." Peter Boyer and Peter Schweizer say this is evidence of Obama's "passive-aggressive relationship with Big Finance," but when someone is passive-aggressive, they're expressing aggression in the guise of passivity. This is passivity in the guise of aggression.
As for finishing the job, even when the Volcker Rule is implemented in July, the banks have two years to comply -- and to further water it down. Or, if Mitt Romney wins, repeal the Dodd-Frank bill altogether, as he's pledged to do.
Hearings were held Tuesday in the Senate Banking Committee on finalizing the derivatives rules. Before the JPMorgan debacle the leading Democrats, Chairman Tim Johnson and Chuck Schumer, wanted to lighten protections. Now, Johnson says the JPMorgan case illustrates "why opponents of Wall Street reform must not be allowed to gut important protections for the financial system and taxpayers." But where was that tough talk before? After all, what happened with JPMorgan was inevitable under the looser rules Johnson and Schumer seemed to support as of a few weeks ago.
The Times editorializes that "JPMorgan's fiasco should be a teachable -- even a transformational moment." Well, don't hold your breath.
It's clear the solution to the destructive effects of the financial euphoria-driven boom and bust cycle will not be found in Washington. The banks will always win on that front -- they own the lobbyists, and the lobbyists have a stranglehold on the legislative process. When piecemeal rules are written, the banks will hide behind complexity and loopholes.
So we all need to stop forgetting. We need to tap back into the outrage we felt when the financial crisis erupted in 2008. And maybe there could be some sort of Clockwork Orange-like aversion therapy for those inside the banks. Just imagine what would happen if any time a dazzling new financial transaction is mentioned, an electric shock follows -- strong enough to make us question the wonders of financial "innovation." It's sometimes said that humans have natural aversions to snakes and cannibalism. Maybe with the right kind of training we can eventually add to that list financial trades in which complexity has somehow magically removed all the risk.
Would this aversion therapy work? I'm not sure, but I know it's got a better chance of stopping the next nobody-saw-that-one-coming crisis than a watered-down Volcker Rule. Otherwise, a few years down the road, we're going to once again find ourselves in a lot of pain, wondering, "How could I ever have forgotten just how horrible this is?"
Add your voice to the conversation on Twitter: twitter.com/ariannahuff
Robert Reich: Why Obama Should Be Attacking Casino Capitalism -- Both Romney's Bain and JPMorgan
Phil Angelides: Pay No Attention to That Man Behind the Curtain
Ted Kaufman: Big Bank Time Bomb Ticking
Yes, the Glass-Steagall Act must be reenacted...and it must include a few more measures to prevent the stupidity of extreme short-term thinking. We have a stock market now, for example, which is being continually manipulated by its biggest players as they gamble in the options market. The goal of that game is to produce more frequent volatility in stock prices in order to reap regular profits in the options casino that they would otherwise never achieve. That process not only produces more frequent increases and decreases in stock prices on an individual basis, it also causes higher highs and lower lows, with the result that every 7 to 10 years (from the historical record) there will be a huge bubble and then a huge crash in the market as a whole. Those crashes wipe out financial liquidity for small businesses and corporations alike and then the underlying economy (those who actually produce things) goes into rapid decline.
In response to @SamClemens94507 and those who share his archaically Darwinian approach to the financial food chain of our unnatural constructs:
No one "deserves" a bad life or more precisely, a bad start in life. All are born innately equal under the sun and "deserve" an equal opportunity to toil and tarry under its auspicious giving rays. Poverty is inherited as freely as wealth to none of a child's wit or fault...
Frederick Hegel...
I don't really care if they like them or not. How often does a thief have to rob a bank before everyone believe he's a thief? 5 times, 20? Or is once enough to make people cautious of him and take extra precautions to ensure they're not one of his victims?
Banks, particularly the really big ones, have proven they can't be trusted to not make bad decisions if there's a chance even 1 of those decisions increases their bottom line. Since they have very clearly demonstrated an inability and/or willingness to regulate themselves, then that regulation must come from the government.
I personally think regulations should be overly restrictive at first, until the economy is securely back on track, and then some of those regulations can be loosened - but not repealed - ever.
Mitt as gov of Mass raised every state fee and he did it by thousands of %, marriage license was $15.00 went over $100.00 for instance, of course mitt would not call this raising taxes , but fees, its more money out the man's pockets, so call it what you want....
i would like to address health care mandates....if the supreme courts strikes this down....people like my family with a small business will continue to see our plans skyrockett because we are forced to pay for other workers who refuse to pay for their own health care needs.....we have gone thru this for over 25 years....enough
To save the OLYMPICS he went begging to UNCLE SAM and received Help/subsidies and also he told to CUT the Pizzas into 8 SLICES instead of 5 to stick it to the Folks!
R MONEY rich guy who worships money/profits
..i guess that is how you become rich for the lucky ones of course ! because let us face it...........throughout History there has never been more rich people than mid/poor folks
THIS guy wants to PRIVATIZE everything like Schools to benefit one of his sons who has private school
And he want the Housing to HIT BOTTOM, so the other son who is in REAL ESTATE can become a VULTURE and pick the carcasses of people foreclosed on.
faved
But Romney understands these issues completely. It's my hope he'll collect a ton of WAll Streetcampaign contributions and then tell his Harvd B School buddies. "SorrybI'm gonna do what's right"
That's not an absolute formula in the sense that each and every instance of a leveraged buyout will always result in the failure of a business enterprise. However, the leveraged buyout itself loads debt onto the business enterprise, and that debt produces cash for the enterprise...most of which is then pocketed as a 'consulting fee' (profit from the purchase) by the corporation which initiated the leveraged buyout. The enterprise which has been bought has been weighed down with a large debt without much, if anything, to show for it. The primary consideration of the leveraged buyout artist is a return on investment based upon nothing more than the ability to borrow money against the company he's bought (perhaps there is a juicy pension fund cash cow). After that initial transaction and its resulting benefit for the buyer, the only consideration is how long it might take for the company to recover from the debt load, and what percentage of any possible profit might benefit the buyer. Even if the company could ultimately recover, the amount of time necessary to do so might not be acceptable and the company would then be sent into bankruptcy and liquidated.
If a person buys something for a dollar; has the company borrows $5and sells it at arms length to someone else for $2 (including the debt) what has happened?
I'll tell u; the company's expected future cash flow after payment of interest and principal is double what it was before the acquisition.
So save urselfvthe mental gymnastics.
http://www.zerohedge.com/news/are-europeans-about-start-second-half-our-great-depression
"His main concern is that this kind of (bank-run) event can quickly spiral out of the control of even the ECB as he uncomfortably conjures the image of the initial US stabilization that occurred in 1930 to May 1931 only to be knocked back into a greater depression by the failure of Credit-Anstalt, which set off bank failures and eventually defaults in 1932 on many government debts."
This has all happened because of the complete failure to teach monetary, financial, and economic history at our elite Ivy League Universities. Because of this catastrophic educational failure we are still in very big trouble with no end in sight.
Every person in the United States should read this book and it will open their eyes to the sorry and sordid truth of how the world really works. Winner of the 2010 Pulitzer Prize for History.
"LORDS OF FINANCE: THE BANKERS WHO BROKE THE WORLD" (1914-1939)
http://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/159420182X
Thanks........it is probably true.....Now the PLOT is to DISMANTLE the WELFARE STATE all over and have the people line up with a bowl in front of theVATICAN and churches and Mormon temples ?!!!!
Faved
See you in the bread lines before the Churches and Temples of the American Oligarchy.
The American people did not understand the great evil of concentration of wealth in human history. Economic history is just not taught in our system of education. So we are now toast as a society. We are just too dumbed down as a society to ever be able to fight back. It was child's play for them. Absolutely masterful. Like shooting fish in a barrel. I honestly now do not think our society is going to survive. The entire banking system will completely collapse within the next 3-10 years unless there is a new Political Party to speak for Main Street. There is probably only a 5% chance that the American people have the spiritual strength to do it. Our fate really depends on Iraq and Afghan veterans becoming knowledgeable about our sordid financial history.
THE SECRET OF OZ - Bill Still
http://www.youtube.com/watch?v=swkq2E8mswI
LIFE INC. - Douglas Rushkoff
http://www.youtube.com/watch?v=sOBWhVe68os
WEB OF DEBT - Ellen Brown (1 of 5)
http://www.youtube.com/watch?v=QU0XiklHPMc