CHAPTER 12
I’m tempted to say that the crisis is like nothing we’ve ever seen before. But it might be more accurate to say that it’s like everything we’ve seen before, all at once.
—ECONOMIST PAUL KRUGMAN1
Real estate bubbles, bank runs, currency crises, millions laid off, foreclosures, lost retirement—Americans had seen that before. But some things they hadn’t: shadow bank hedge funds (outside banking regulation) wielding trillions, derivatives markets worth trillions, balloon mortgages, financial instrument experiments injected like drugs directly into the economy’s arteries. And everything was insured to the eyeballs against the collapse, which occurred, but without private insurance resources sufficient to actually cover the losses realized. Enter the taxpayer.
As the U.S. economy fell down, the world economy came tumbling after. “HELP!” cried the banks. Bailouts, stimulus packages, skyrocketing debt, taxpayers owning hunks of American International Group, General Motors, and dozens of banks, a national mortgage fiasco, all made their debuts.
For some, the bailout worked: The GDP rose. Banks fattened up. Corporations enjoyed their highest profits of all time. Wall Street sold trillions more in derivatives of unknowable risk. But for most of us, the fix didn’t work: Unemployment persists, foreclosures mount, real incomes for most Americans shrink, and debt looms large.
What happened? Was (is) the economy a house of cards? Before this mess, economists thought finely tuned macroeconomic policy tools had eliminated any possibility of an economic collapse in the United States. Yet, as with anything else, if our assumptions about the way the world works are wrong, our actions may not deliver the expected results.
What Are Finanical Crises, Financial Capital, and Financial Institutions, Anyway?
A financial crisis results when the value of financial capital shrinks, crashes, or disappears on a grand scale. Stocks, bonds, futures, currency, debt (such as mortgages), and complicated financial instruments are financial capital—basically paper, plastic, or electronic assets. Creating, caretaking, and profiting from all this financial capital are financial institutions. These include the U.S. Treasury Department, mortgage companies, commercial and investment banks, savings and loans, unregulated hedge funds, and the Federal Reserve System (privately owned and publicly governed).
Trade or barter is nearly as old as humanity, but the business of business really took off with money, one of our most practical, seductive, and malleable creations. The evolution from barter to the modern economy has followed the evolution of money, useful energy, production, and technology. Money is the bean used to count the value of capital assets. Modern money has evolved beyond the physical tethers of mass and volume, which prevent beans or gold from being instantaneously transferred from New York to Tokyo.
This is one reason financial assets are loosely, and sometimes not at all, bound by the economic laws of supply and demand. Unlike all other goods and services, there is no physical constraint on money supply. Without bothering to print a dollar, Treasury Secretary Tim Geithner released $600 billion into the American banking sector by buying U.S. bonds held by banks with electronic money created by the Treasury Department.
Independence from physical laws enables financial assets to perform impressive and sometimes dangerous gymnastics. As Herman E. Daly noted, while it is impossible due to physical constraints for real pigs to multiply without limit, the debt incurred by borrowed money to buy pigs, or “negative pigs,” can multiply indefinitely. Positive pigs live and die by the laws of physics and biology. Debts, negative pigs, are a function of accounting calculations, free from physical reality.2
A house is a house, with walls and a roof. Its mere value, rising or falling, does not mean physical improvements in the building. The mortgage on that house is an associated financial “paper” asset with a calculated, expected stream of payments. The value of that mortgage can rise or fall dramatically with the expectations of financial returns.
Totally unlike built, social, human, or natural capital, money and financial capital require market exchanges to deliver value to people. Your house provides value as shelter regardless of its market value. But a dollar is worth nothing until you exchange it for something you value. Thus the value of a bundle of house mortgages can collapse completely, while the value of shelter associated with those mortgages remains constant, as long as people live in those houses.
Financial bubbles develop when “overly exuberant” (as Alan Greenspan called them) bidders inflate the market value of financial assets. When speculators, investors, or consumers lose trust and change their expectations and purchasing, the bubbles burst—just like stocks in 1929 or mortgage values in 2008.
As the Tufts economist Neva Goodwin points out, “Of all the kinds of capital, the adjective ‘productive’ is most often questionable when applied to financial capital.”3
The Finanical Shell Game in a Nutshell
During the Great Depression, legal firewalls were built for the U.S. financial sector, government guarantees protected the bank accounts of average Americans, and the United States had the world’s most regulated, robust, competitive, and stable banking sector, supporting the growing middle class.
Until the 1990s, community-based banks and savings and loans provided most mortgage lending. Your local bankers looked you in the eye, checked your finances, and knew your boss. They gave you a loan and filed the house title in the bank vault until you paid it off. That was the American way, and it worked. But hundreds of savings and loans went bust in the 1980s. A deregulation binge spurred corruption and a savings and loan collapse, costing taxpayers $87.9 billion. But loaded with bipartisan contributions from the banking sector, Congress further deregulated the banking industry after the scandal. These days, your mortgage could be owned by a Saudi king, a plumbers’ union, or doughnut chain. This expands the universe of lenders but severs the connection between local lenders and borrowers, eliminating community due diligence and increasing the peril of reckless lending and borrowing.
Thousands of U.S. banks did not participate in predatory lending. Many institutions did not buy the “toxic assets” of subprime loans. Thank God! Yet their participation wasn’t required to ignite the financial forest fire that burned everyone. We’ll tell the story using the case of the largest commercial bank failure in American history, that of Washington Mutual (WaMu) Bank.
After banking deregulation and the 2000 dotcom bust, Fed chairman Alan Greenspan lowered interest rates to boost economic growth, making borrowing money less expensive. People bought houses. Housing prices rose. As almost all people with sufficient desire, income, and credit had already purchased houses, banks expanded the market and lent to people whose credit or income records were weak, people more likely to default on loans. WaMu was the sixth-largest deposit bank in the nation with forty-three thousand employees. WaMu CEO Kerry Killinger saw an opportunity. Push high-interest-rate subprime mortgages, expand market share, and use new financial instruments that investment banks such as Lehman Brothers had created to bundle these mortgages into investment packages.4 These mortgage bundles, once appraised, valued, rated, and insurable, could be sold to any investor anywhere. It seemed like a great idea.
Here’s how it worked. WaMu (and many banks then and now) gave strong financial incentives to mortgage brokers for riskier, higher-interest, higher-profit loans, such as adjustable rate mortgages (ARMs), balloon and zero-down mortgages, lending to people less likely to repay. Many banks, including now defunct Countrywide and Wachovia, did the same. With the help of investment banks such as Goldman Sachs and Lehman Brothers, loans were bundled in a variety of pretty packages and then priced, rated, and sold. These mortgage bundles were assets, providing a stream of income from the mortgage payments, and like other assets, could be insured against performance failure or loss. That meant more business for American International Group (AIG), which insured trillions of dollars of these mortgage bundles. The loans generally originated with commercial banks and were packaged by investment banks, or by the quasi-public financial institutions, Fannie Mae or Freddie Mac, sold to investors, and insured by AIG and others.
For most of the 119 years that WaMu existed, the bank held the loans it made and practiced due diligence. But due diligence became unimportant in the early twenty-first century. Because the loans were to be packaged and sold off, whether the borrower could repay the loan was someone else’s problem. Between 2003 and 2007, Killinger and top WaMu management gave standing orders: If someone wants a loan, approve it. The New York Times interviewed one WaMu broker who took a photo of a loan applicant mariachi singer with his guitar as evidence that the singer had a six-figure income as a substitute for pay stubs. “The photo went into a WaMu file. Approved.”5
A congressional investigation noted: “WaMu’s compensation system rewarded loan officers and loan processors for originating large volumes of high risk loans, paid extra to loan officers who overcharged borrowers or added stiff prepayment penalties, and gave executives millions of dollars even when its high risk lending strategy placed the bank in financial jeopardy.”6
Additionally, WaMu “used shoddy lending practices riddled with credit, compliance and operational deficiencies to make tens of thousands of high risk home loans that too often contained excessive risk, fraudulent information or errors.”7
WaMu was also steering borrowers into higher interest, larger loans.8
Lehman Brothers pioneered these financial instruments in the 1980s. The subprime mortgage bundles paid higher returns because subprime borrowers were paying higher interest rates. Pricing was based on mathematical statistics and number theory, with a few assumptions. Expected default rates were based on history and the belief that real estate values would continue to rise. These assumptions also underpinned actuarial calculations for insuring these highly complex bundled mortgages. National and global investors hungrily snapped up the high-interest bundled mortgages.
Remember: even though labor productivity had increased dramatically between 2000 and 2007, real wages actually declined during the same period.9 Inflation-adjusted median household income in the United States fell 9 percent from 2000 ($52,301) to 2009 ($47,777).10 While the rich were getting richer, everyone else was either treading water or getting poorer. Many borrowers, especially subprime borrowers, could not make their mortgage payments. As they defaulted on their loans, income from the purchased bundled mortgages declined.
By 2007, the default rate on early subprime loans shot up. Subprime mortgage bundles were labeled toxic. Investors suddenly stopped buying. But WaMu and other banks continued subprime lending. They couldn’t sell the bundled mortgages. By January 2008, banks like WaMu were suffering losses from holding on to their own subprime loans. Facing huge losses by summer, WaMu sold a chunk of its ownership to a hedge fund for an $8-billion cash infusion. In September, WaMu was downgraded by credit rating agencies. In eight days almost $17 billion was electronically withdrawn by large depositors (not FDIC insured), causing a 1930s bank run on WaMu.11
The total Federal Deposit Insurance Fund held about $45 billion. The failure of $300-billion WaMu could have wiped out the fund with hundreds of other U.S. banks yet expected to close. Alarmed federal regulators acted fast. During that week, without the knowledge of WaMu management, board, staff, or investors, federal regulators secretly put WaMu up for sale to a few select competitors, while preparing to seize the bank. On September 25, 2008, the Office of Thrift Supervision seized WaMu and the next day sold most of the bank to the highest bidder, JPMorgan Chase. Valued at over $300 billion in January 2008, WaMu was sold for $1.9 billion in September.12 Don’t you hate it when $298 billion evaporates?
The government had other options. Placing seized banks under temporary government trusteeship, chopping them up and auctioning the parts off, and allowing any bank or institution to bid on them would have raised far more capital and rewarded healthy smaller banks that had stayed out of the rush to folly.
Being sold on the cheap to JPMorgan Chase could have been the end of WaMu. But in America, no financial collapse ends without lawsuits. Among those left holding parts of the $47.3 billion in “toxic” mortgage-backed securities that WaMu sold were the Chicago Policemen’s Annuity Fund, Boilermakers National Annuity Trust Fund, and Doral Bank of Puerto Rico, which all filed suit hoping to pick over the bank’s meager leftovers.13
Yet those losses pale in the face of the cumulative devastation that bad lending and fancy financial instruments wreaked across America. For cities like Cleveland, Stockton, Miami, Las Vegas, and others, recovery may be decades away. Foreclosures hit a record 1.2 million in 2010.14 At least 11 million Americans and up to 25 percent of homeowners were underwater, owing more on their mortgages than their homes were worth.15
Canadian Banks Are Still Healthy, Eh?
Over 350 American banks failed between 2008 and April 2011.16 Not a single Canadian bank failed.17 Major Canadian banks remained profitable throughout the financial crisis. Because Canada’s Liberal Party refused to give in to calls to deregulate its banking system to compete with American deregulation in the late 1990s, Canadian banks had little exposure to the complex toxic asset mortgage bundles.18 While more than 25 percent of American housing loans were subprime, only 3 percent of Canadian housing loans were subprime.
Canada, often criticized for overregulating banking, maintained vigilant oversight. Canadian banks are protected from foreign competition and focused on Canadian markets. They have a higher reserve requirement and thus greater liquidity to weather any crisis. Canadian bank CEOs are compensated far less than their U.S. counterparts yet have performed demonstrably better. Canadian banks have more public shareholders focused on investment over speculation. Canadian banks needed no rescue. Evidently, an ounce of prevention is worth a trillion pounds of bailout.
In 2010, the World Economic Forum (WEF) ranked Canada as having the soundest, safest banking system in the world. The United States ranked 111th.19 Interestingly, the WEF ranked Canada lower in “competitiveness” than the United States.
Snoring Treasury Department Awakes to Push Panic Button
Investors that had gobbled up mortgage bundles like chocolates discovered them to be poisonous. The greediest banks keeled over, insolvent. Hedge funds shrank like wet cotton candy. Lehman Brothers, after cooking up many of the derivative chocolates, was caught neck deep in unsold mortgage bundles, just like WaMu. Worried investors pulled their money out, and Lehman Brothers headed for bust. Lehman CEO Richard Fuld made a desperate and personal appeal to Treasury Secretary Henry Paulson (previously the CEO of competitor Goldman Sachs) to be saved.
Paulson wasn’t buying. Lehman threw itself up for sale at the mercy of the market. No buyers. Electronic withdrawals quickly exceeded cash on hand, and Lehman Brothers went bankrupt. At the time, Lehman Brothers was holding over nine hundred thousand derivative contracts with more than eight thousand separate firms. That did not include more complex commodity, currency, and credit default swap trades needing to be “unwound.” Legal claims against collapsed Lehman topped $1 trillion.20 Two years later, it has cost over $1 billion in legal fees (one lawyer charged $990/hour) just to partially unwind the mess.21
The conservative Economist magazine warned of capitalism’s potential collapse. Without apology, Treasury Secretary Paulson belatedly stormed into Congress warning of economic conflagration and asking permission to write checks of any size for anything he deemed necessary within a $700-billion budget to save the banking system, with no accountability to Congress.
The bailout vote failed. Congress couldn’t accept no accountability. The news tanked the stock market. Investors, including retirement funds, lost trillions. Spooked, Congress passed an amended bill. Over $700 billion was provided to bail out more than 450 crumbling American banks. Layoffs hit Wall Street. As AIG siphoned taxpayer money in 2009, it also paid out $180 million in bonuses to the very executives who had previously received bonuses for insuring the mortgage bundles that demolished the company.
Consumers stopped spending. Demand dried up. Businesses stocked up inventory, cutting orders. Housing construction froze. Businesses and government laid people off. Unemployment surged. Both unemployed and employed purchased less. Automobile sales crashed. Chrysler and GM faced bankruptcy. Incomes, sales, and housing values fell. Local, state, and federal government tax revenues shrank. Governments, firms, and consumers cut spending. Demand fell further. Prices fell (deflation), reducing business income. Talk of recession turned to talk of depression.
Perhaps more than anything else, the collapsing economy guaranteed the election of Democrat Barack Obama.
The U.S. Financial Tsunami Slams the World
Let’s consider a few cases here.
China built a financial war chest totaling over $2 trillion in reserves, a precaution after the 1997 Asian financial crisis. Buying U.S. bonds, China helped finance American debt, the bank bailout, and the stimulus package, rescuing the dollar from greater devaluation. The Chinese government maintained a set exchange rate with the U.S. dollar (pegged as opposed to flexible exchange rate) so that the Chinese yuan could not appreciate against the dollar. This policy ensured that Chinese exports would remain cheap and flowing to the United States. With no independent unions, depressed wages, weak environmental standards, and huge investment flows from Wall Street, Europe, and Japan, China’s communist/capitalist economy surpassed Japan as the world’s second largest in 2010 and stands to surpass the United States in size by 2020. Still, the crisis reduced demand for Chinese goods and left Chinese workers without production jobs. Without unemployment benefits, millions of them left coastal cities to return to their poor farming villages.
Iceland’s prime minister David Oddsson, a Ronald Reagan admirer, privatized the nation’s three national banks, which had financed a prosperous nation. The banks were purchased by the “New Vikings,” a handful of aggressive Icelandic entrepreneurs.22 Oddsson, with faith in unregulated markets, did not regulate, monitor, or guarantee the private banks. Offering high interest rates, the New Vikings brought in international capital and bought banks in Britain, Scandinavia, and the Netherlands, also luring deposits from pension funds, companies, schools, and individuals. They also gobbled up toxic derivatives. By 2008, there was a run on the Icelandic banks, and they collapsed.
The government seized the banks to save Iceland. The three banks held the deposits of virtually every Icelandic citizen. It was like a sardine trying to swallow a whale. The banks were nine times the size of the entire Icelandic government; a full bailout was impossible. Iceland only guaranteed Icelandic citizen’s deposits. Depositors in northern European countries faced a 1930s, lose-your-shirt banking failure. The United Kingdom and other countries covered portions of the debts, demanding that Iceland repay over time. Iceland’s parliament voted to dutifully pay the debt, but President Olafur Grimsson refused to sign the bill.
Iceland held the first referendum since 1944, on whether to pay the privately generated banking debt owed outside the country. It was equivalent to over $400,000 per person or $1.6 million in debt for a family of four. The vote was 93 percent no. Icelanders rejected a second referendum to pay the defunct private banks’ debts in April 2010.23 When Dave visited Iceland in December 2009, the University of Iceland economics professor Brynhildur Davidsdottir described the discussion there:
We realized this was not the economy Icelanders wanted. We had a national dialogue with meetings in every Icelandic town about what kind of economy people want. It was clear that Icelanders don’t want an economy that makes a few people wealthy while risking everyone else’s well-being. We found that Icelanders want stable, safe, healthy communities, education, health care, and a fair, sustainable economy.24
Ireland collapsed as a real estate bubble, shaky banks, low taxes, and deregulation delivered insolvency to banks and the government. The Irish left for opportunities elsewhere, as they had after the potato famines of the nineteenth century. Irish finance minister Brian Lenihan announced a colossal government bailout of private Irish banks on September 30, 2010. The bailout, funded by the European Union and International Monetary Fund, included government purchase of “toxic” loans. It proportionally dwarfed the American bailout; as the BBC reported, “In other words, more than half of Ireland’s GDP has now been devoted to keeping its banks afloat.”25
Stimulate the Economy!
President Barack Obama inherited one of the biggest economic disasters in modern history. Since few people relish recession, it was an opportune time for change. As President Bush was packing to exit the White House in January 2009, the United States lost 779,000 jobs—the highest monthly job loss since employment record keeping began in the 1930s.26 Overall, 7.8 million jobs were lost between January 2008 and October 2010.27
President Obama laid out a stimulus spending plan of over $700 billion to revive the economy. He successfully ended the economic freefall that Bush’s team had created. Obama’s economic team held solidly to the Keynesian economic view that recession is a problem of falling demand for goods and services that in turn results in a downward spiral of business and worker income, job loss, and shrunken money supply.
The Keynesian solution is government deficit spending to stimulate sagging demand. Stimulating demand is the key to getting a flat economy back on its feet. Keynesian economists hoped that the money would be spent on worthy projects, but if none were available, paying people to dig and then refill holes would still put money in workers’ pockets, expand consumption, increase demand for other products, strengthen the banking system, and get the economy moving. Deficit spending is the Keynesian solution.
This has been accepted economic policy since the New Deal. Every president experiencing an economic downturn has used it since the 1930s, including Reagan and both Bushes. While deficit spending is possible at the federal level, many states have constitutional constraints that bind them to balanced budgets. This means that when tax revenues shrink, so do expenditures, exactly the path Keynes advised against.
The American Recovery and Reinvestment Act of 2009 approved $787 billion in spending; including $275 billion in grants, contracts, and loans for projects, $224 billion for supporting state and local governments, and $288 billion in tax breaks. Certainly, without this package, potentially millions of additional jobs would have been lost. Stimulus grants supported public schools, private companies, and more at the height of the recession. The program reported funding 750,000 jobs in the first three months.28
For many Keynesians, the stimulus was too small. To fundamentally improve the economic and employment picture would have taken a larger stimulus package estimated by the economist Dean Baker at $1.8 trillion over two years.29 Congress was not ready for that. While the stimulus, combined with reform for banks and Wall Street, would have shifted both public and private investment, dramatic Wall Street reform was not to be. Big surprise.
It did not help that Obama’s top economic adviser, Larry Summers, was ill equipped for his job. As chief economist at the World Bank, Summers infamously said that the World Bank should support the export of toxic waste to poor countries. A friend of Wall Street, Summers made millions after joining the hedge fund D. E. Shaw Group as managing director in 2006. He received $135,000 for a single speaking appearance at Goldman Sachs.30 There is a conflict of interest when economic policymakers are in bed with Wall Street. Little wonder that the United States resists European demands for greater regulation of banks and hedge funds. Summers left the administration in 2010.
Fundamentally, the hastily prepared stimulus was geared more to bring back 2007 than to dramatically shift private and public investment to build a twenty-first-century economy. The goal was to revive GDP growth, not to achieve the greatest good for the greatest number over the longest run. In contrast, the 1930s New Deal was not designed to simply rebuild a 1920s economy; instead, it focused on dramatic new goals, measures, policies, and institutions to build a middle class and new economy. The New Deal used the new macroeconomics to build a new U.S. economy.
Obama’s stimulus did arrest the economic collapse. It repaired buildings, instituted energy efficiency, funded state and local budgets, gave corporations tax relief, and restored corporate profitability as never before. American corporations chalked up the highest annualized profits in recorded history in late 2010 at $1.659 trillion.31 However, the stimulus did not build a fundamentally better economy or put in place changes necessary to avoid another meltdown.
What Should We Do Now?
It’s clear that our financial system is not working properly despite enormous and rising profitability. In 1950, the financial sector comprised 9 percent of total U.S. corporate profits. Notwithstanding the financial crisis, the finance sector comprised 29 percent of total American corporate profits in 2010.32 This occurred while toxic instruments drove our economy into the ground and while providing obscene salaries and bonuses for its chieftains. We should immediately take far more serious steps than those contained in the financial regulation legislation of 2010, though that legislation, and especially the Consumer Protection Agency it created, was a step in the right direction.
But we need more.
• Financial transaction taxes. While we pay transaction taxes in our everyday lives, such as sales and excise taxes on just about everything bought and sold, financial transactions are not taxed. We suggest a small transactions tax, (of 0.05 percent), which would be inconsequential to investors who buy futures, stocks, or bonds with the idea of keeping them and using them to create wealth and employment. But it would eliminate much of the manipulative speculation we see today. For example, the trader that caused the “flash crash” in 2009 by dumping $4 billion in value, trading twenty-seven thousand shares in 0.2 seconds, would pay significantly.
It would eliminate events like the flash crash caused by the lightning-fast turnover of stocks and futures. Speculators skimming profits by trading massive amounts of stock, unconcerned with real economic productivity, would pay. Investors would face no appreciable cost increases. Financial transaction taxes would not solve all Wall Street’s problems, but they would lend greater market stability and resilience, raise tax revenues from speculators, and make taxation fairer across all transactions in the economy.
Switzerland, Sweden, Brazil, and the United Kingdom have financial transaction taxes, and London remains one of the world’s great financial hubs. As proposed by European countries, these taxes would be most effective when imposed at the same rate across nations within a multilateral global agreement. Brazil’s former president, Lula da Silva, proposed a 1 percent financial transaction tax for the entire global economy, with the money raised to be used to lift up the poor and combat global warming.
• Currency trading tax. Over $4 trillion is traded in currency exchanges every day.33 Most of this is pure speculation. Currency speculation supports few jobs, cannot provide goods or services, and redistributes wealth from people who produce it to speculators who do not. Profits from currency trading rely on micromargins earned from vast trading volumes. A currency tax of $0.005 percent would not burden travelers, trade, or honest international business and would raise an estimated $33 billion globally each year.34 It would reduce currency speculation, pressing these vast funds toward real investment. This proposal also is best applied in a multilateral framework. In a globalized world, we need some global rules.
• Restructuring the Federal Reserve System of the United States. A central bank is an essential part of a national economy. The U.S. system has had little fundamental change in almost one hundred years. Banks have far too much control over the Federal Reserve System. No other industrialized nation has such an antiquated system. Yet the Federal Reserve System still fills an important role. Those who advocate simply eliminating it are nostalgic for the nineteenth century. No nation with a modern economy can do without a central bank. The Fed has an essential role in promoting public-minded economic policy. But it needs to be revamped for the twenty-first century, so that it serves all Americans and not just the banks. We recommend the creation of an advisory committee that would consider ways to reform the Federal Reserve System.
• Raising reserve requirements, reducing leverage, limiting derivatives. The reserve requirements for banks operating in the United States should be raised from 10 percent to 20 percent, providing greater security from bankruptcies and less need for bailouts. Legal limits to leveraging should be imposed to reduce the impact of private risk-taking on taxpayers. The unregulated derivatives market is still wildly out of control, especially where insurance derivatives (so-called credit default swaps) are concerned. The United States is still at risk of a larger derivatives catastrophe, leaving the taxpayer as the ultimate insurer.
• Bringing back usury laws. In 1979, charging interest over 8 percent on loans or credit cards would land you in jail in Washington State and many other U.S. states. Even before there were laws, usury was a biblical sin. At one time, all U.S. states had usury laws to prevent individuals, banks, and institutions from charging unfair rates of interest. Legal rates of interest must be flexible so as to respond to high inflation, but there should be limits to the real rates that can be charged.
• Regulating hedge funds. Many people are determined to see hedge funds as an enemy, and we, too, think they should be regulated. Yet what hedge funds do is exactly what is needed. Nimble investment funds can shift sufficient capital to bring good ideas to market quickly. We live in a world of 7 billion people. Building a twenty-first-century economy must shift trillions of dollars from unproductive activities to productive investment quickly. There is an important role for hedge funds to play. The regulation needed should penalize speculative investment and encourage productive investment.
Like the groundhog’s shadow, financial crises can herald either spring or a longer winter. They can catalyze a spirit of working together to improve the economy and everyone’s lot, or they can bring scapegoating, back-biting, and greater misery. In 2011, Wisconsin governor Scott Walker attacked school teachers as pampered union members with unaffordable benefits, in an effort to eliminate their collective bargaining rights. He used some of the same arguments employed by opponents of restrictions on child labor eighty years ago.
The rights and benefits Walker sought to eliminate are all taken for granted in Europe, Japan, and neighboring Canada, and are increasingly common in developing nations as well. Yet rather than presenting a program to extend benefits to greater numbers of people, Governor Walker and other laissez-faire politicians work to eliminate the framework of legislation that helped build a strong middle class and strong economy.
But they have overreached. Citizens have awakened, and from chilly Wisconsin, prolonged protests and recall efforts may bring a new spring once again.
The financial crisis is far from over. But solving it, like all the other issues brought up in this book, requires a holistic approach and a much clearer understanding of our goals for an economy that provides the greatest good for the greatest number over the longest run.