CHAPTER 11
In the next ten years we shall increase our wealth by 50 percent. The profound question is: Does this mean we will be 50 percent richer in a real sense, 50 percent better off, 50 percent happier?
—PRESIDENT RICHARD NIXON, STATE OF THE UNION ADDRESS, 1970
In the language of popular economics, Chapter Eleven is a synonym for bankruptcy. And in a real sense, that’s what this chapter is about: bankrupt Americans and the bankrupt ideas that bankrupted them. The Era of Bankruptcy followed the Era of Middle-Class Expansion, and it started with one of the most tumultuous years in American history.
More than forty years of hindsight suggest that 1968 may well have been the United States’ pivotal year, the year two roads diverged and we Americans took the wrong one. For another twelve years, the wrong road ran close to the road we’d been on since the 1930s, crossing it back and forth until, after the election of 1980, it veered sharply to the Right.
John remembers well that turning-point year of 1968 with its wild ups and downs of hope and despair. He was a college student in Wisconsin, and very liberal, though as a freshman, he’d been a bedrock conservative. The 1960s did that to many of us.
The year began with a surprise: In Vietnam, the National Liberation Front, or “Vietcong” as Americans called it, launched its Tet Offensive, overwhelming American and South Vietnamese troops in many cities across South Vietnam. The “light at the end of the tunnel” that President Lyndon Johnson had seen for the war in Vietnam suddenly looked like the headlight of an oncoming train. Though the Americans pushed back, casualties were heavy, and public opinion began to turn more strongly against the war. On many campuses, the words of Phil Ochs’s ringing anthem, “I Ain’t Marching Anymore,” echoed the thoughts of thousands.
It’s always the old who lead us to the war, always the young who fall.
Now look at all we’ve won with a saber and a gun and tell me, was it worth it all?
Already, Senator Eugene McCarthy of Minnesota had entered the Democratic presidential race against Johnson, his party’s incumbent president. McCarthy’s opposition to the war, and his sympathies with many of the quality-of-life changes sought by the youthful American counterculture, attracted throngs of student supporters. They cut their hair and went “clean for Gene,” trying to win votes among adult Americans. Those under twenty-one could not yet vote themselves. On March 12, McCarthy surprised the political handicappers by coming within seven points of Johnson in the New Hampshire primary, the first of the election season.
On March 16, as McCarthy gained in the polls, another opponent of the war, New York senator Robert Kennedy, joined the race. Where McCarthy was cool and cerebral, Kennedy was passionate and engaging. Where McCarthy appealed to middle-class students, Kennedy connected with minorities and the urban working class. He shared not only McCarthy’s antiwar sentiments but also his broader critique of other weaknesses in American society. Two days after announcing his candidacy, Kennedy gave the momentous speech at the University of Kansas challenging the Gross National Product (see chapter 1 in this book) as a measure of the health of our nation.
For those Americans hoping to see even more progressive change and the immediate end of the Vietnam War, Kennedy’s entry into the race was electrifying. Now there were two antiwar candidates, and one of them was a member of the political establishment, the brother of a beloved late president. President Johnson’s polling numbers dropped again.
Exit Lyndon Johnson
On March 31, on national television, a tired Lyndon Johnson announced, “I will not seek nor will I accept the nomination of my party for a second term as President of the United States.” Had the speech come a day later, it might have been taken for an April Fool’s joke. But Johnson was serious. In the antiwar town of Madison, Wisconsin, where John watched the speech that night, revelers filled the streets. In hindsight, Lyndon Johnson was the victim in a Greek tragedy. But for his hubris in expanding the Vietnam War, Johnson might well have been remembered as one of the greatest of American presidents. Instead, he was a lonely and defeated man.
On April 2, McCarthy won a landslide in the Wisconsin Democratic primary. For John and his friends, it seemed almost too good to be true: the war would be stopped, and the drive for greater justice in America would end in victory.
Of course, it was too good to be true.
Two days later, in Memphis, Tennessee, Martin Luther King Jr. was slain by an assassin’s bullet. In the streets of many cities, angry mobs burned and looted. In spite of fears for his own life amid an Indianapolis crowd enraged by the King shooting, Robert Kennedy mourned the assassination with an eloquent plea for justice and understanding.
But only two months later, Kennedy himself was dead, gunned down after winning the California primary, which all but assured him the Democratic nomination for president. Across the country, millions gathered to watch his funeral train. They listened as his brother Edward eulogized him.
Beneath it all, he has tried to engender a social conscience. There were wrongs which needed attention. There were people who were poor and who needed help. And we have a responsibility to them and to this country. Through no virtues and accomplishments of our own, we have been fortunate enough to be born in the United States under the most comfortable conditions. We, therefore, have a responsibility to others who are less well off … This is the way he lived. My brother need not be idealized, or enlarged in death beyond what he was in life, to be remembered simply as a good and decent man, who saw wrong and tried to right it, saw suffering, and tried to heal it, saw war and tried to stop it.1
Bobby Kennedy understood what the economy is for.
Worldwide Expectations
Despite the tragedies of King’s and Kennedy’s deaths, there was a glimmer of hope as summer approached. These inspiring leaders had been killed, probably, by lone, crazed gunmen. The vast majority of Americans deeply mourned their passing. More Americans seemed to care about the goals King and Kennedy had lived for; for many, their short but committed lives were inspirations to work even harder for justice.
Moreover, the new desire for a better world was not confined to the United States. In France and elsewhere in Europe, rebelling youth called for economies more committed to quality of life, social justice, and care for planet Earth. In eastern Europe, the signs were even brighter. Nineteen sixty-eight had brought a “Prague Spring” in Czechoslovakia, as the Alexander Dubček government loosened restrictions on both political and economic freedom and promised “socialism with a human face.” There was a sense that capitalist and socialist nations alike could become more like “middle way” social democracies, where the quality of life had improved dramatically since the Second World War.
This potential was highlighted on July 22, when the New York Times published an inspiring call for just such a change. “Reflections on Progress, Peaceful Coexistence and Intellectual Freedom” was written by the physicist Andrei Sakharov, father of the Russian H-Bomb.2 Passed originally through the Soviet Union as samizdat, it suggested a new interest in freedom and democracy among the Soviets and called for a future that combined the best aspects of socialism and capitalism. John devoured Sakharov’s hopeful manuscript. Perhaps there was still a chance …
But hope peaked in midsummer and soon began to fade.
On August 5, the Republican National Convention opened in Miami and nominated Richard Nixon for president and Spiro Agnew for vice president. Nixon suggested that a “silent majority” would prefer to silence students, antiwar critics, and other “nattering nabobs of negativity,” as Agnew referred to opponents of the Nixon agenda.
It also became increasingly clear that Vice President Hubert Humphrey would be the Democratic nominee, as a majority of delegates were chosen by party insiders, not primary voters. Because Humphrey had supported Johnson on Vietnam, the prospect of a Humphrey candidacy angered antiwar protestors. They made plans for massive demonstrations in Chicago during the Democratic National Convention, scheduled for August 26–29.
The Beginning of the End
On August 21, shortly before the convention began, Soviet tanks rolled into Prague, crushing the Czech experiment in freedom. For many Americans, fear of socialist totalitarianism was restored. Prospects for Sakharov’s convergence were shattered.
The Democratic convention went as predicted, with Humphrey nominated. But less expected were the massive demonstrations outside the convention and the response of Chicago mayor Richard Daley, who urged his police to crush the protests. On August 28, a “police riot” sent hundreds to the hospital. The massive exercise of state power brought a sense of hopelessness to former Kennedy and McCarthy supporters.
But most Americans supported Daley’s use of extreme force. They recoiled at the appearance and language of many of the protestors. Their fear would benefit Richard Nixon, who barely edged out Humphrey in the November election. It wasn’t yet obvious, but the New Deal consensus, which had created a middle-class America, narrowed class differences, and brought great improvements to the lives of the disadvantaged, was slipping away.
But certainly not all at once.
Richard Nixon, Environmental Champion
Though elected as a conservative, Nixon governed as a moderate. Tough on crime—the bane of 1960s urban life—he doubled federal funding for police. But his vision for America, expressed in his 1970 State of the Union address, was, if anything, more progressive than conservative.
I see a new America as we celebrate our 200th anniversary six years from now. I see an America in which we have abolished hunger, provided the means for every family in the nation to obtain a minimum income, made enormous progress in providing better housing, faster transportation, improved health and superior education.3
Nixon used the speech to promote new rules that were good for the longest run. He warned of “metropolitan areas choked by traffic, suffocated by smog, poisoned by water, deafened by noise.”
The great question of the seventies is, shall we surrender to our surroundings, or shall we make our peace with nature and begin to make reparations for the damage we have done to our air, to our land, and to our water? Restoring nature to its natural state is a cause beyond party and beyond factions. It has become a common cause of all the people in this country. It is a cause of particular concern to young Americans because they more than we will reap the grim consequences of our failure to act on programs which are needed now if we are to prevent disaster later.
Imagine a Republican leader saying this today, when the party will not even support the weakest bills to turn back climate change.
Nixon’s words grew even more urgent as the speech unfolded.
Clean air, clear water, open spaces—these should once again be the birthright of every American. If we act now, they can be. We still think of air as free. But clean air is not free, and neither is clean water. The price tag on pollution control is high. Through our years of past carelessness we incurred a debt to nature and now that debt is being called. The program I shall propose to Congress will be the most comprehensive and costly program in this field in America’s history.
Nixon was talking serious tax dollars here. Imagine even a Democrat doing that today. Then he summed his environmental message up in a grand finale.
We can no longer afford to consider air and water common property, free to be abused by anyone without regard to the consequences. Instead, we should begin now to treat them as scarce resources, which we are no more free to contaminate than we are free to throw garbage into our neighbor’s yard. This requires comprehensive new regulations. It also requires that, to the extent possible, the price of goods should be made to include the costs of producing and disposing them without damage to the environment.
Richard Nixon, ecological economist. Advocate of a guaranteed income and full-cost pricing. A dangerous leftist by today’s standards.
Concern for the environment, fueled by television footage of beaches black from the Santa Barbara oil spill and fires burning in the middle of the Cuyahoga River in Cleveland, culminated in massive demonstrations on the first Earth Day, April 22, 1970. Though the Far Right attacked the event as a sneaky way to celebrate Lenin’s birthday (we’re not making this up), 20 million Americans joined the Earth Day activities, pushing the government to act.
In his first term, Richard Nixon signed the most significant environmental legislation in American history: the Clean Air Act, the Clean Water Act, the Endangered Species Act, and the Environmental Policy Act, creating the EPA. In the years that followed, Nixon’s actions improved our environment in countless ways. The famed environmentalist David Brower, who led the fight for many of these policies, later lamented to John that the environmental movement never thanked Nixon for what he had done.
But Nixon, too, was the victim in a Greek tragedy. The good he did was more than matched by his escalation of the Vietnam War into Cambodia and the horror of the killings of students at Kent State, only two weeks after Earth Day. His response to antiwar and civil rights protestors was COINTELPRO, a program of FBI infiltration, harassment, agents provocateurs, and even cold-blooded assassination of movement leaders, in the case of Black Panther Fred Hampton.
His drive for power led to secrecy and “dirty tricks,” including the Watergate break-in. His landslide victory in 1972 emboldened conservatives as Lyndon Johnson’s 1964 landslide had emboldened liberals. But the exposure of the illegal actions that helped achieve his reelection led to his resignation two years later, leaving Nixon, like Johnson, isolated, reviled, and defeated.
Business Week Spells It Out
For the Right, Nixon’s demise was a temporary setback. Corporate America and its highest-income benefactors had seen their profits shrink during thirty years of New Deal reforms. They hoped to turn back the clock by promoting tax reduction, deregulation, and privatization of government functions. They were determined to stop the New Deal consensus in its tracks. A chilling editorial in Business Week in October 1974, two months after Nixon’s resignation, made clear their goals—and the difficulties involved in achieving them: “It will be a hard pill for many Americans to swallow; the idea of doing with less so that big business can have more. Nothing that this nation or any other nation has ever done compares with the selling job that will be needed to get the people to accept the new reality.”4
Business Week was talking about the greatest good. But for the smallest number. In fact, this switch is exactly what happened, but the “selling job” was easier than expected.
Elected president in 1976, Jimmy Carter only bought half of the Business Week equation. He believed we all needed to do with less, including big business. During Carter’s term, the nation faced a growing energy crisis and double-digit inflation, in part a result of the rising price of energy, in part because of growing consumer demands, and in part because of galloping federal debt from the costs of the Vietnam War.
Inflation assuredly did not give big business more. Credit began to dry up as legal limits on usury, the interest charged on loans, ran smack into fast-rising prices. Credit card companies sued states that had caps (about 9 percent ) on interest rates. They would lose money, they argued, if inflation was higher than the allowed rates.
In 1978, the Supreme Court ruled unanimously to exempt national banks from state-based usury laws. Banks began issuing credit cards that often carried interest rates of 18 percent and above, starting a trend that encouraged very high levels of consumer debt, and a major shift of monetary resources from the manufacturing sector to finance. According to Tom Geoghegan, who has dealt with many usury cases as a labor lawyer:
[The Supreme Court decision] sealed what had been a trend throughout the country, which is lifting these interest rate caps for banks and giving consumers easy credit on the premise that they would just pay tons and tons of interest so that the banks were protected if the loans weren’t repaid. In fact, the banks had incentive to hand out credit cards and hope that the loans would not be repaid, because the interest rates on these credit cards were so high.
You know, if you are Mr. Potter in It’s a Wonderful Life and can only get six percent, seven percent on your loan, you want the loan to be repaid. Moral character is important. You want to scrutinize everybody very carefully. But if you’re able to charge 30 percent or, in a payday lender case, 200 or 300 percent, you don’t care so much—in fact, you actually want the loan not to be repaid. You want people to go into debt. You want to accumulate this interest. And this addicted the financial sector to very high rates of return compared to what investors were used to getting in the real economy, the manufacturing sector.5
That decision contributed enormously toward big business having more while the rest of us made do with less. The decision, on the surface, was understandable: Clearly, banks need to earn more in interest than the rate of inflation, or they will not loan. But the Court might have set a usury limit at so many percentage points above the inflation rate; it did not have to eliminate usury rules entirely.
At the time of the 1978 decision, the financial sector was earning less than 15 percent of total annual profits in America. By 2008, that percentage had risen to 42. It dropped to 29 percent with the financial crisis but has now been rising again.6
Carter’s Call for Sacrifice
On July 15, 1979, President Carter delivered his most famous address. Commonly termed the “malaise” speech, though Carter did not use that word, it was a call for sacrifice.7 Carter suggested turning away from the unbridled consumerism that many saw as the American Dream, and toward energy independence and sustainability. He acknowledged a nation in crisis, where inequality was already beginning to grow and people doubted that the future would be better. He quoted the black mayor of a small Mississippi town: “The big shots are not the only ones who are important. Remember, you can’t sell anything on Wall Street unless someone digs it up somewhere else first.”
This seems to have been forgotten by many of us.
“Too many of us now tend to worship self-indulgence and consumption.” Carter told the American people. “Human identity is no longer defined by what one does, but by what one owns. But we’ve discovered that owning things and consuming things does not satisfy our longing for meaning. We’ve learned that piling up material goods cannot fill the emptiness of lives which have no confidence or purpose.”
Carter, who installed solar panels on the White House, called for a “solar bank” to provide funds leading to “the crucial goal of 20 percent of our energy coming from solar power by the year 2000.” He urged a windfall profits tax on oil companies to fund the bank. And he urged Americans to save energy.
I ask Congress to give me authority for mandatory conservation and for standby gasoline rationing. To further conserve energy, I’m proposing tonight an extra $10 billion over the next decade to strengthen our public transportation systems. And I’m asking you for your good and for your nation’s security to take no unnecessary trips, to use carpools or public transportation whenever you can, to park your car one extra day per week, to obey the speed limit, and to set your thermostats to save fuel. Every act of energy conservation like this is more than just common sense—I tell you it is an act of patriotism …
I do not promise you that this struggle for freedom will be easy. I do not promise a quick way out of our nation’s problems, when the truth is that the only way out is an all-out effort. What I do promise you is that I will lead our fight, and I will enforce fairness in our struggle, and I will ensure honesty. And above all, I will act. We can manage the short-term shortages more effectively and we will, but there are no short-term solutions to our long-range problems. There is simply no way to avoid sacrifice.
And finally, Carter suggested that America was at a crossroads: “There are two paths to choose. One is a path I’ve warned about tonight, the path that leads to fragmentation and self-interest. Down that road lies a mistaken idea of freedom, the right to grasp for ourselves some advantage over others. That path would be one of constant conflict between narrow interests ending in chaos and immobility. It is a certain route to failure.”
It was, however, the route that Americans chose. As the historian David Shi explained, Carter failed to understand “how deeply seated the high, wide and handsome notion of economic growth and capital development had become in the modern American psyche.”8
The Problem, Not the Solution
Jimmy Carter’s opponent in the 1980 election, the actor and onetime Borax spokesman Ronald Reagan, accused Carter of suggesting that America’s best days were behind it. He promised to unleash new growth and remove any need for sacrifice, by cutting back government, slashing taxes and regulations, and privatizing state functions. “Government cannot be the solution to our problems,” Reagan said, “because government is the problem.” His vision, Reagan made clear, was an America where it was still possible for someone to “get rich.”9
Smooth-talking and affable, Reagan overwhelmed the nay-saying Carter. He stripped Carter’s solar panels from the White House. He appointed an antienvironment crusader, James Watt, as interior secretary, and another, Anne Gorsuch, to run the EPA. Reagan worked quickly to dismantle the structures of economic security that had been in place since the New Deal. He crushed striking members of PATCO, the air traffic controllers’ union (which had actually endorsed him), bringing in scabs to take their jobs.
His laissez-faire-leaning administration was fiercely antilabor and exacerbated a decline in unionism from nearly 30 percent of workers when he took office to around 12 percent today. He deregulated the phone companies, the airlines, and other sectors of the economy. He massively increased military spending in an effort to make the Russians say uncle. (They did.) And he cut taxes sharply on the rich, from a marginal rate of 50 percent to only 28 percent.
He called his program supply-side economics. The idea was that with lower taxes, businesses would invest more and the economy would grow rapidly. With higher profits for business, wealth would “trickle down” to those below like a golden waterfall. Some of his economists suggested that the low tax rates would actually increase tax revenues, and for a time, they did. But the federal debt and deficit mushroomed dramatically. The new taxes did not make up for the increase in military spending. For some of Reagan’s advisers this was a good thing: Lack of government revenue would “starve the beast” (government), making it impossible to fund social programs and requiring cutbacks in domestic spending.
The Reagan era had its successes. Economic growth quickened, and inflation was greatly reduced. But the new wealth did not trickle down. It gushed up, lifting the yachts and swamping the rowboats.10 Inequality rose dramatically, with conspicuous consumption for the rich, and a “greed is good” ethic on Wall Street, contrasted with long lines at the food banks and homeless shelters. Forty years of policies expanding the American middle class were suddenly history. For Reagan’s winners, it was “morning in America.” For the losers, it was the beginning of a long, dark night that still shows little sign of dawn.
Under Reagan, America swallowed Business Week’s bitter pill. Moreover, “starving the beast” meant the government was less able to provide important services. Hobbled by cuts, government became less effective in meeting needs, less a solution and more a problem, making Reagan’s attack a self-fulfilling prophecy and weakening public confidence in the state to a degree from which it may never recover.
For the Right, Reagan was the white knight in shining armor, the hero who remade America for the better. In our view, no one did more to set it on a course toward catastrophe. During Reagan’s term in office, while Gordon Gekko raked in the cash, corporations closed hundreds of American manufacturing plants, either shipping them to low-wages countries like China or investing the money that would have been used to maintain them in high-stakes financial speculation, as they did in the period leading up to the financial crash of 2008. Auto companies began to make more on their financing than on their cars.
In gritty working-class towns that had once thrived on industry, workers, hung out to dry, took service jobs paying half what their manufacturing jobs did, and began to survive until the next paycheck with high-interest payday loans. Some inner-city areas were all but abandoned to muggers, crack cocaine dealers, and pimps.
Slick Willie to the Rescue
Had the Soviet Union not collapsed between 1989 and 1991, the years of the first George Bush presidency might have been quickly forgotten. Of course, there was the catastrophic 1989 Exxon Valdez oil spill, and the quick defeat of Saddam Hussein in 1991, but the Bush administration was marked most notably by a recession that brought back the Democrats after a twelve-year hiatus. Unable to quickly turn the recession around, the Clinton/Gore administration tasted defeat in 1994’s dramatic loss of Congress to the Republicans, who rapidly slashed government again, cutting the entire welfare program.
But Clinton was a charismatic leader, like Reagan. People sensed that he “felt their pain,” and reelected him in 1996. Clinton made an effort to increase equality in America, raising taxes on the rich to a marginal rate of 39 percent. As a result, the gap between productivity and worker’s real wages, which had been rising since Reagan’s election, did not widen further. Moreover, Clinton’s second term was a time of unequaled prosperity, fueled by the computer revolution. For the first and only time between the mid-1970s and the present day, compensation for all workers, even the poorest, increased. Higher taxes and greater prosperity helped Clinton turn the massive Reagan-era deficit into an annual surplus.
America grew giddy with success. Time-poor (from the longest working hours since the 1950s) but cash-rich, higher-income Americans began spending as if there was no tomorrow. They bought new and bigger houses, SUVs, hot tubs, and leaf blowers. They took short but expensive vacations and flew twenty-five times as often as their grandparents did in the 1950s.11 With cash to spare, many of the rich invested heavily in the stock market, sending the Dow Jones average soaring. But for most Americans, personal savings rates dropped steadily.
Though the dotcom craze that made millionaires of many collapsed late in Clinton’s second term, a new bubble took its place. Housing prices exploded, and low interest rates led to a surge in new mortgages, often by first-time buyers, and backed up by very little collateral. Banks sold lots of these mortgages to investors, who packaged them into new financial instruments called derivatives. Because these derivatives combined risky loans with more secure ones, they were seen as a hedge against any mortgage failures and as particularly good investments. They received AAA ratings from bond agencies, and their numbers expanded rapidly, as did housing loans.
Many banks grew increasingly leveraged.12 Where they once had outstanding loans averaging only seven times their assets, now they lent out twenty or thirty times as much. Wall Street loved the derivatives game because each time one of them changed hands, the brokers received a fee. Bankers traded most derivatives privately, rather than on the open market where they could be regulated.
We Should Have Listened to Brooksley Born
There were some signs that this kind of speculation on ever-increasing housing values was risky—the collapse of an investment firm here or a local government there, millions lost by Procter & Gamble on derivatives that exploded. The dangers worried Brooksley Born, Clinton’s appointee as director of the Commodity Futures Trading Commission, whose job it was to oversee financial transactions.
“We didn’t truly know the dangers in the market because it was a dark market,” Born later explained. “There was no transparency.” Born believed that if something big enough went wrong, the derivatives market could destroy the entire financial system.13
A brilliant lawyer who graduated first in her class at Stanford Law School and was the first female editor of the Stanford Law Review, Born announced plans to regulate derivatives, first and foremost, by requiring transparency in their trading. This was not good news on Wall Street, well represented, as always, in the highest ranks of the government. Federal Reserve chairman Alan Greenspan asked Born to lay off. He told her he would not even regulate fraud; it would be exposed, and the market would correct everything. In Greenspan’s view, regulating derivatives would cause banks to reduce housing loans, the goose that was laying the golden eggs for a soaring stock market and superheated economy.
Clinton’s treasury secretary, Larry Summers (later a top adviser to Barack Obama), also called Born, telling her in no uncertain terms to leave derivatives alone. “They were totally opposed to it,” Born said of her efforts to make derivatives transparent. “That puzzled me. You know, what was in this market that had to be hidden? Why did it have to be a completely dark market? So it made me very suspicious and troubled.”
Called “irascible, difficult, stubborn, unreasonable” by Securities and Exchange Commission chairman Arthur Levitt, Born decided to ignore Greenspan and Summers. Only Congress could stop her, so Greenspan, Summers, Levitt, and Summer’s predecessor, Robert Rubin, went to Congress. “I think it’s very important for us not to introduce regulation for regulation’s sake,” Greenspan, a devotee of the libertarian Ayn Rand, told Congress, which responded by declaring a regulatory freeze, shutting down Born. At the end of 1998, Born resigned, never suspecting what a prophet she would turn out to be.
The following year, bullish over growth in the derivatives market, Congress passed a bill, sponsored by the Texas Republican Phil Graham, repealing the Glass-Steagall Act, a 1933 law that required separation of savings and investment banks. The law had been enacted because under Roosevelt’s FDIC, personal savings in banks were backed by government insurance. Consequently, the government wanted to be sure that these savings were not gambled away in speculation on the part of bankers. With Glass-Steagall eliminated, savings banks were free to jump into the derivatives market. In 2000, Congress passed the Commodity Futures Modernization Act, which banned regulation of derivatives. Together, these two actions by Congress created a time bomb.
The You’re-on-Your-Ownership Society
Later that year, with a little help from the Supreme Court, George W. Bush was elected president. Bush governed so far to the right that he might have made Reagan blush. He cut taxes again and wanted to privatize practically everything. He called his vision the Ownership Society. Americans, Bush said, should be fully responsible for their own health care, retirement, and other needs. As a first step, he sought to privatize Social Security. The ownership society meant that Americans would essentially be on their own.14
Bush sold government to the highest bidders (the most generous contributors to his campaigns). He expanded Medicare prescription funding in a gift to the pharmaceutical industry. He expanded military funding to pay for wars in Afghanistan and Iraq. Coupled with his tax cuts, these moves quickly turned Clinton-era government surpluses into some of the worst deficits in American history.
At the same time, with no regulation of derivatives, and the view of most experts that these financial instruments—complex mathematical formulas developed by the brightest minds on Wall Street—had taken the risk out of lending, the housing market went wild. Banks lent to nearly everyone, whether applicants had good credit or not. Blamed by conservatives for causing the housing bubble, the quasi-government agencies Freddie Mac and Fannie Mae got into the game themselves after seeing the money that everyone else was making in derivatives.
Around the midpoint of the Bush II presidency, a few folks became more aware of how risky the derivative packages of home mortgages were. These people realized that a few defaults could torpedo the derivatives, so they bought insurance against failure of the derivatives. These insurance plans, called credit default swaps, began selling like hotcakes. By 2007, the derivative/credit default market totaled about $600 trillion.
Of course, since the credit default swaps were actually insurance policies, making money on them beyond the fees charged to exchange them depended on the failure of the derivatives. Some firms even began betting against their own financial instruments; they were arsonists hiding in the housing market. With banks then leveraged as high as thirty to one or more, a small number of defaulting mortgages would mean disaster. And that’s what happened.
Endgame
As home prices rose, and people took on high-interest mortgages with hardly any money down, the housing market ran into another reality of the Bush years: Except for a modest uptick during Clinton’s second term, wages for American workers had not kept pace with inflation or productivity. Indeed, men between the ages of thirty and forty were earning less in real dollars than they did in 1975.15 Under Bush, though the highest 1 percent of earners raked in a bonanza of new wealth, even the modest gains that workers made in the late 1990s evaporated. With a Bush administration that refused to prosecute labor violations by businesses and weakened unions even further, wages actually went down.
Between 2001 and 2007, while labor productivity rose by at least 10 percent (and some estimates put the rise at twice that), the median wage for workers fell by 3 percent.16 “Effective demand” for goods began to dry up, unemployment rose, and the housing market shuddered. America’s inequality gap, which widened far more under Bush II than under any president before him, came back to bite us like a starving Tyrannosaurus rex.
Unable to keep up with their mortgages, many poorer borrowers defaulted. The housing market collapsed, many derivatives collapsed with it, and so did companies like the American International Group (AIG), which had sold enormous numbers of credit default swaps. The stock market went into a nosedive.
“It was my worst nightmare coming true,” Brooksley Born told the PBS television program Frontline. “Nobody really knew what was going on in the market. The toxic assets of many of our biggest banks are over-the-counter derivatives, and caused the economic downturn that made us lose our savings, lose our jobs, lose our homes. It was very frightening.”
In 2008, the whole House of Trickle-Down crumbled overnight. Around the world, the entire capitalist economy went into a tailspin, especially in countries most heavily tied to American banks. It looked like curtains for the economics of greed. But remember the Golden Rule? Yep, those with the gold make the rules. So all of us were forced to write a $700-billion bailout check to the failing banks. Main Street saved Wall Street, which had already ruined Main Street. The poor saved the rich.
One might have assumed that this would have been the end of the supply-siders, trickle-downers, tax-cutting, anti-egalitarian, privatizing deregulators. Their answer instead was a demand to privatize, deregulate, and cut taxes some more. Keep doing what we’d been doing and hope for a miracle. Which of course, as everyone knows, is the working definition of insanity.