"Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.' He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people. . . .'"
From Herbert Hoover's memoirs (Financier Andrew Mellon served as Secretary of the Treasury under presidents Harding, Coolidge and Hoover.)
Oh is it tempting! Wouldn't it be nice to let all the greedy Wall Street firms go under? Down go their fiefdoms, their mega-million bonuses, their revolving doors to high policy posts and their exalted masters-of-the-universe status. And good riddance.
And wouldn't we all benefit from a little Social Darwinism (or Schumpeter's "creative destruction") to get rid of the weaker firms? Surely, it would give us a chance to rebuild the entire financial sector from the bottom up. (See NYT op-ed by Sandy B. Lewis and William D. Cohan here.
There's only one flaw in this punishing vision: on the way there we'd be destroying the livelihoods of millions upon millions of working people for the sins of Wall Street and the super-rich. It's bad enough right now with somewhere between 25 and 30 million unemployed or underemployed. You want 50 million?
Now here comes the hard part... the part that the free market apostles refuse to face up to. We can not afford to let giant interconnected financial companies go down. Whether we like it or not, in modern capitalism virtually every business and every public agency relies on credit. When the financial markets freeze, as they did last fall, it pushes the real economy off a cliff.
In fact, we applied creative destruction to Lehman Brothers and it caused a global panic. AIG also was about to fail that very same weekend because it couldn't pay off the $450 billion worth of bets it had made on risky derivatives. If AIG had welched on its bets, dozens of the largest financial institutions in the world would have become insolvent. In turn, those institutions would have taken down hundreds of others and so on. Had we allowed all these giant failing institutions actually to go in bankruptcy (as the CNBC free-marketeers repeatedly suggest), we would have recreated the Great Depression.
These financial institutions had a gun to our heads: they were indeed too big to fail. I don't want to believe this, but it's true.
So instead following Andrew Mellon's advice we more or less now own AIG, Fannie Mae, Freddie Mac, CitiCorp, Bank of America, GM, and Chrysler. We also greased the skids to merge away Bear Sterns, Wachovia and Merrill Lynch. The FDIC in the last six months has taken over 45 failed banks.
To date, the financial crash has cost us $700 billion in TARP funds, $787 in stimulus money (to patch up the gaping hole the financial crash tore out of the real economy), and about $20 billion for the auto industry with $50 billion more on the way. We don't know what the asset guarantees and FDIC takeovers will actually cost. Conservatively, we're up to about $1.5 trillion in taxpayer money -- which divides up to equal nearly $5,000 from every man, women and child in the country.
Not a pretty picture. Now what?
The Obama plan is to regulate the big boys in more effective ways while selling back the nationalized businesses to private investors as soon as possible. The hope is that by more carefully monitoring systemic risk, we can prevent it.
Good luck. These policies are likely to fail because they don't get at the real cause: The financial crisis is a direct result of the redistribution of wealth to the very top of the income ladder.
Starting in the mid-1970s, income and wealth became ever more concentrated in the hands of a few. The numbers are very clear: In 1973 the top one percent of income earners took in 8 percent of the nation's total income. By 2006, the top one percent got nearly 23 percent of the pie, the highest proportion since 1929.
According to a review of 2006 income tax returns reported in the NYT, "the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980."
This wasn't the result of an act of god or because the best and the brightest got better and brighter. It was the result of deregulatory policies, tax cuts on the wealthy, corporate loopholes and subsidies, cuts in social programs, letting the real minimum wage decline, the undercutting of labor laws, the undermining of unions, and unfettered globalization.
This elite money created the demand for ever more investment products that Wall Street was more than eager to supply -- and grow fat on. Along the way this surplus capital inflated the dot.com boom, credit card mania and the housing extravaganza.
The simple truth is that our system does not work when we encourage so much money to rise to the top. Sooner or later it funds a financial casino. And when fantasy finance crashes, which it always does, we pay the tab.
If you want to stop your tax dollars from bailing out financial institutions again and again, we've got to do two things: move money from the super-wealthy to working people and shrink down the financial sector while building up our human and material infrastructure in the real economy. These are the yardsticks by which to judge the Obama administration's economic policies.
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)