One Year After Lehman: Another Crash Coming?
"What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade.... That means that more talent, more resources will be going to other sectors of the economy. I actually think that's healthy. We don't want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design."
President Obama, May 2, 2009, Reuters
Obama's statement seems so passé. Now the stock market is rising. Our 401ks no longer are on life-support. The financial sector is showing resilience. And the Great Recession is ending. Then why should we fear another crash?
Maybe the most sophisticated economic models all point upward, but our sense of history should be flashing warning lights. There are a few enduring lessons we can't avoid: any nation that fails to find enough work for its people, and that doesn't rein it its obscene distribution of income, is courting catastrophe. Consider these problem areas:
1. As Larry Summers recently said, unemployment will remain, "unacceptably high." Truer words were never spoken. He's telling us that the recovery will be so anemic that current massive job shortfall is likely to continue for years. According to the most recent government numbers, there are about 29 million Americans out of work or forced into part-time work. If that continues, as Summers predicts, consumer demand will be low and misery for millions will be high. That's bad economics.
2. We have done almost nothing about financial institutions that are too big to fail. Supposedly we're supervising them more carefully. But all the evidence suggest that they are off and running into a new round of fantasy finance. Goldman Sachs already is selling repackaged synthetic securities, precisely the kind that crashed the system last time around, (and Moody's again is rating them AAA.) Large banks are making a move into "Death Bonds," finding new ways to skim profits by buying up and securitizing life insurance policies of the elderly and ill. We could stop this madness either by nationalizing the largest institutions entirely, or breaking them down so that they truly were small enough to fail. Trust-busting Teddy Roosevelt would have understood what to do. But in today's Washington such a discussion is off limits.
3. There still are no controls on the specialty derivatives that caused the last crash and likely to contribute to the next one. In fact, I've been told by reliable sources that derivative traders are pooling a bit of their upcoming bonus money to fund a billion dollar lobbying effort to make sure no serious reforms take place.
4. Despite President Obama's insightful words last May, nothing has been done to shrink Wall Street's size, let alone its political power. The Pay Czar was supposed to crack the whip on outrageous compensation packages. Instead, Mr. Czar immediately said that it's okay for Andrew J. Hall, an oil speculator, to receive $100 million in trading fees from CitiGroup, a bank which we basically own. What a Wall Street recruiting poster for new math whizzes!
5. Most importantly, we've failed to address the major cause of the entire mess: the underlying distribution of income and wealth. The fantasy finance casino and its bubbles grew from the fact that the super-rich accumulated too much capital after years and years of tax "reforms" that gushed money to the top. When they ran out of real world investments, their capital rushed to Wall Street's speculative securities. And they are doing it again. You can't limit catastrophic speculation without returning excess capital to society. And there is plenty of excess: The latest tax data shows we have the worst income distribution since 1929. Not only are we failing to learn from history, we are begging to repeat it.
The failure of Washington to clamp down on Wall Street is also creating a very negative political feedback loop between government and the public. Most Americans are furious about Wall Street's outsized pay and profits. They are also furious about the inability of the administration and Congress to act. There's a growing sense that the rich and powerful are in control of financial policy and of the political process. This fuels anti-government anger which undermines the things we need government to do: raise taxes on the super-rich; put in place a windfall profits taxes on Wall Street; cap outrageous financial compensation packages; and enact public programs and national industrial policies that create real jobs for the unemployed.
Given the failure to enact serious reforms, it wouldn't take much to push the economy off the cliff again: a severe pandemic flu, a terrorist attack, a major weather event or an unexpected failure of a company that is too big too fail could set off a major economic relapse.
I sure hope I'm wrong. I hope we're not again betting our future in the fantasy finance casino. I hope the miracle of the markets will lead to a massive boom in jobs and incomes for everyone. I hope everyone's 401ks will prosper. And I hope President Obama will succeed.
But as Wall Street recycles the money we have given it to lobby against any and all reforms, it's obvious that hope is not enough. We also need a very strong dose of audacity.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.
Follow Les Leopold on Twitter: www.twitter.com/les_leopold
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
As the saying goes, "There's good news and bad news."
The good news is that we elected a very capable president.
The bad news is that a/the president may always be controlled by his or her political party.
1. Unemployment will remain "unacceptably high." We've been told again now that jobs are a low priority in the scheme of things.
2. "Too big to fail." Sure, not to mention that a lot of the bailout funds were used to purchase additional institutions to make them even bigger.
The corruption of congress has been rubbed in our faces more than at any time in U.S. history. Term limits, vote them out, etc. will give us some "Meet the new boss, same as the old boss."
Unless we instill honesty in congress, we're doomed. Why don't we require reps. to--
1. Take an oath of honesty to be accompanied by an initial (and then random) lie detector tests.
2. Have all reps. agree to serve a minimum of ten years in prison if convicted of any corruption in office.
3. Have all reps. submit to alcohol/drug testing when they enter congressional sessions and especially when they vote. Since many Americans are required to do such testing for employment, congressional reps. should also be tested since they have the most responsible jobs of all.
That would be a start to correct our situation. We'd find out who really wants to serve the people.
Former Treasury Secretary Henry Paulson, a free market protege, put the Republican's government hands off belief to the ultimate test by allowing Lehman Bros. to collapse. This sent so much shock waves through AIG and the banking system that he was forced to concede his laissez faire ideology by injecting government capital into the market to put out the economic wildfire and thereby putting the nail in the coffin of Reaganomics.
And one more thing. The healthcare debate is simply to distract us from the essential issue. As usual
You forgot one thing, how the media has utterly failed in its journalistic duties. Again, because of corporate influence.
Corporations are enemies of the people and must be destroyed
And, yet, the Supreme Court is ready and able to say that corporations have no limit to influence policy with their money. When that happens, it is all over for the people, unless we all get our act together to boot everyone in Congress out and start over.
It's clear that Obama can't stand the idea that anyone (especially the rich) dislikes him.
All those who continue to swoon at his looks and beautiful speeches need to stop and look at what's really happening. We all need to start disliking him now, and make him aware of it -- though it's probably too late.
In the face of all this, it's really hard to believe that things like, "what do you expect him to do in seven months" or "would you rather have Mccain" or "look how wonderful he is compared to Bush" or "just wait, he's biding his time for the right moment" are still floating around. I'm thinking that's gotta be some sort of Obama sponsored group that's saying these things at this point.
Lordy, Lordy, Lordjin........Did you fall down and hit your head really really hard? If in truth you actually look remotely like your photo posting, then there may be a legitimate explanation for your attitude. (Reminds me of that old song, "I'm my own Grampa"). These idiots have been entrenched and growing obscenely obese on their own greed and at our expense for so long that no one individual can wrestle them to the mat in 6 decades, much less 6 months. As long as we have nitwits protesting the wrong issues, carrying guns to public outings where the President is speaking, repeating moronic slogans that appeal only to interbreeds in the Ozarks, and protecting the corporate powerhouses at the expense of individuals, that's how long it will be before intellectual bankrupts like you see the light.
shut up and kiss me.
Filed under, "what do you expect in less than 6-7 months."
No one can wrestle down the entrenched titans in less than six months, granted. But does that mean he shouldn't even try? You're defending Obama with defeatist rationalizing. Now that's hardly worthy of someone from the "fired up, ready to go" crowd, is it?
And how will anyone ever be able to wrestle them to the ground or even close to the ground with the inaction we've seen from our president?
You're not helping.
"We also need a very strong dose of audacity." Leo Leopold.
You, who are frustrated with President Obama:
I think it was just that, "audacity", that got the Kennedy brothers killed. capiche?
While this article discusses the very real possibility of financial collapse, it does not paint a real picture of what a financial collapse might look like. Perhaps, it would be easier to rally people around the concept of changing our ways if we had an idea of where it is we may very well be heading. No one under 80 really has any idea of what a depression (or worse) is.
You mean like bread lines?
Kind of. But there are bread lines in any decent bakery. A depression is a lot more than bread lines.
Finance: A portion of the economic engine of a country which produces no salable goods, but which is compensated for determining what portion of salable goods the people who actually produce receive. In a communist nation, this is the state.
Capitalism is fundimentally a means of distributing produced goods and services to individuals based on the value of the goods or services produced by that individual. Finance is a middleman which takes a portion of the goods and services that otherwise would have gone to the individual producing actual items of value.
In other words, the financial sector is taxing us just like a communist government would.
Now if the finance sector is small, (historically finance was 5% of the US GDP), that tax is also small. But today's finance sector is 20% of the GDP. This means that only 80% of the GDP represents production, and that the finance sector has decided they deserve 20% of that!
This leaves only 64% of the GDP to provide goods and services to people who make things. The Finance tax rate is higher than the Government Tax RATE!!!
I too hope you are wrong, Mr. Leopold, though I'm afraid you're right. Everything Obama and the dems have done since winning a mandate from the people has been, in fact, anti-people--and very much pro-corporation.
With a blue-dog like Obama in the White House, a Congress that (except for a few) is bought-and-paid for by businesses that write its legislation, and a media that enables and propagates all this, where's our way out?
What could be a more blatant example of government corruption and media malfeasance than the fact that, while 70% of us are demanding single-payer/a public option, it's the crazies who get air time and real alternatives are hardly spoken about. And Obama/Congress actually get away with saying that 'there's not enough support' to pass any serious health care reform! In what democracy does a 70% majority lose out? The answer is, we're losing out to the 1 percenters, and this is no longer a democracy.
Here's the challenge. Make the economy less of a "winner takes all" affair, but do it without using the threat of violence. Nobody has figured that one out yet.
Interesting article. The connection between rampant, irresponsible speculation and the fact that so much of our nation's wealth is now concentrated in the hands of so few never occurred to me. As for Obama, it couldn't be clearer that he's no FDR. Far from it. Obama is a tinkerer about the edges, when he doesn't abandon his promises altogether, not a fighter for fundamental change of any kind. He's by nature an appeaser of the powerful, I'm afraid.
Obama is in the clutches of the elites, just like Bush and Clinton. They have all sold out. Big time! Until we act together as a people, they have won.
You are preaching fundamentals when in fact, the market is driven by speculation, emotion and momentum.
It has no real logic, and another crash will occur with the next crisis in "faith."
The one promising feature in this market is the enormous amounts of money floating around the globe looking for a place to park. There are 3 places to park it: American Bonds, American Assets and the American Stock Market.
China, Russia and the Middle East have the most amounts of cash, but are reluctant to keep it themselves because of the immense corruption and reletive instability in their own governments. The EU is the second best parking place, but can handle 1/10th the cash as the US economy.
'China, Russia and the Middle East have the most amounts of cash, but are reluctant to keep it themselves because of the immense corruption and reletive instability in their own governments.'
That may be true now, but given the extent of the corruption on our own shores, and the probability that the Supreme Court might soon allow corporations to donate to election campaigns--thereby sealing the fate of the corporate state--I frankly think the sort of corruption seen in China will be seen here shortly. Where's the opposition with enough power to stop it from happening?
they're also reluctant to keep it because they don't want to be stuck with vast quantites of dollars when the dollar collapses.
Mr. Leopold.
I honestly, earnestly, hope you are wrong also.
However, I have a sinking feeling in the back of my mind that you are not.
first, there's the President's passage of his healthcare bill. having proved he gets what he wants, in victory he will move onward to wall street and then energy. taking on wall street will begin at the start of the new year.
Have you seen what's in his health care bill? Hardly a victory, rather a complete co-option.
That health care bill will sink us deeper and deeper in the hole. Good article on Counterpunch:
Health Care Deceit, one of the best arguments for single payer and why we need it.
http://www.counterpunch.org/roberts09142009.html
My take is we are perched on a narrow ledge less than half-way to the bottom. For years I've been afraid that either the consumer debt overhang or balance of payments could blow us up. As it turned out the was a real estate game. I don't see the strength in the underlying economy to prevent a further major slide.
You must be logged in to comment. Log in or connect with
