Introduction
In 1998, Lawrence Summers, deputy secretary in the Clinton Treasury, who would later serve as director of the National Economic Council and President Obama’s chief economist, became concerned about the efforts of Brooksley Born, director of the Commodity Futures Trading Commission (CFTC), to regulate derivatives. Director Born, not a Washington insider, believed that derivatives were little more than bets, and usually huge bets that could not be covered if the bet was lost. Not to regulate them could lead to a catastrophe.
Summers believed otherwise, and he had the backing of Wall Street and of many government luminaries as well. With their support, he made a now legendary phone call to Born to pressure her to back off from regulation. “I have 13 bankers in my office,” he said, “and they say if you go forward with this you will cause the worst financial crisis since World War II.” 1
Deregulating Banks
“Growing inequality,” insists Danny Dorling , “is the result of market failure.” 2 Joseph Stiglitz has argued much the same, blaming excessive financialization, unregulated derivatives, unchecked speculation, and government guarantees (bailouts), for rigging markets in favor of big finance: “Excessive financialization — which helps explain Britain’s dubious status as the second-most-unequal country, after the United States, among the world’s most advanced economies — also helps explain the soaring inequality.” 3
Perhaps the lowest levels of moral depravity, as Stiglitz further insinuated, have been practiced by investment banks. These banks, which were designated as “too big to fail” in the wake of the financial crisis of 2007, after they had “failed” and were bailed out, were a clear demonstration, if one were needed, of how inequality was “planned,” not the result of chance or simply the market distributing wealth according to ability. It was widely known that banks, prior to the meltdown of 2007–2008, had mismanaged risk and allocated capital in ways that were to hurt many millions. It was also widely known, and not only by economists, that the bonus system then emerging among the large investment banks provided large incentives to take risks—or to cheat as some came to call it. Securitization, that mystical device that required Ph.D. physicists to at least partially understand the new forms that capital was taking, which were supposed to manage risk by simply spreading it widely, provided incentives to mortgage lenders to weaken standards, leading to excessive borrowing. Securitization simply made it possible to lend the same money over and over again, with the added device of sub-prime loans—low-interest loans that would later reset at higher rates that were often unaffordable. The result was that millions of families were lured into the low-interest mortgage market. Eventually, the mortgage bubble caused by an overleveraged market, which pushed the price of homes up beyond all realistic values, was bound to create a bubble that had to burst.
Business has long argued that government is on its back, and that a free market is the best and the fairest way to grow prosperity. But business leaders know that government is required to make a market. Government sets the rules, passes the laws, and enforces them. Government grants patents or denies them. Government decides who has access to a market and at what cost. Government enters into trade agreements or rejects them; it sets customs duties or abolishes them. Government enforces contracts and establishes the rules governing them. Government regulates or deregulates commodity markets and stock exchanges. Government licenses companies to do business and sets the standards for compliance. Government can give away its research, as it has done to pharmaceutical companies fairly routinely, and it can lease vast tracts of forest or oil fields on terms that are virtual giveaways.
Government also makes the rules that govern banks. As a result, the banking and financial sector has become outlandishly prominent and wealthy not only because of its ability to attract talent, but also because of its ability to dismantle, influence, or control regulatory bodies. Business, and especially the banking and financial sector, has sought and achieved legislation that has allowed—and sometimes even promoted and helped to subsidize—banks to speculate in risky securities like derivatives, with minimal government oversight. And government has mostly failed to invoke anti-trust laws, allowing a few banks to become large enough to virtually suppress competition, extract huge sums of money from the real economy, and minimize regulation.
Government can also preserve usury laws or nullify them. Until 1978, usury laws protected consumers against the rapacity of lenders. But that same year the Supreme Court effectively eliminated usury laws by ruling that national banks were at leisure to apply the interest rates of the states where they had their headquarters to all other states where they did business. Three states, Delaware, Nevada, and South Dakota, which had already pushed to abolish usury laws, understood at once the revolutionary implications of the court’s judgment. So did banks like Citibank, which had strenuously advocated ending limits on credit card interest rates. The decision of the Supreme Court meant that a bank like Citibank could relocate to South Dakota, with virtually no limits on what it could charge its customers there, and then export South Dakota’s rate to any state they pleased, even if that state had its own usury law. In effect, no more usury laws and no more cap on interest rates for credit cards. The new banking environment was so hospitable, courtesy of the Supreme Court, that other banks would soon head to South Dakota, or Delaware or Nevada, where they could begin promoting their credit cards, more or less at the interest rate of their choice. Soon, mortgage lending followed suit, including the infamous sub-prime loans that were central to the mortgage crisis meltdown of 2008. 4 The warning of the Supreme Court to put some kind of restrictions on interest rates, which was also part of its ruling in 1978, was not heeded by Congress. Once again, government regulation gave way to “self-indulgence, irresponsibility, and imprudence,” as David Brooks would put it decades later. 5 Rather than prudence and fairness, banks were at leisure to enrich themselves with impunity, using the new rules to prey upon the foolish and unsophisticated.
It was not always that way. In fact, all Christian nations, which profess themselves to ardently embrace the strictures of biblical moral codes, have routinely invoked the rhetoric of the New Testament: “Sell all that thou hast and distribute unto the poor, for it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.” 6 Jesus held humanity to a high standard, advising believers in the Kingdom of God to sacrifice for the needy. Yet in today’s creed of greed, the advice of Jesus has been entirely turned on its head and inverted: the rich make gains at the expense of the poor (and the not so poor), though not without often accusing the impoverished that they are poor because of their greed and indolence.
Abolishing usury laws and scrapping legal limits on interest rates were a stunning reversal of Christian compassion. It was just as stunning an apologia for the greed of the super-rich who are always preaching that the unlimited wealth of the few is sure to benefit those who are relatively deprived. It was also to overlook the reason for much borrowing: divorce, unemployment , catastrophic health costs, and stagnating wages. In a country like the USA, which still denies universal healthcare and promises to continue doing so in the wake of the elections of 2016, where wages have stagnated since 1973, actually falling below 1973 wages when adjusted for inflation as late as 2016 for much of the population, where 17% of the nation has fallen into poverty and with millions more at risk—figures that are comparable in the UK—and where unequal education in both the UK and the USA makes folly of the claim of “equal opportunity,” Congress would have done better to mandate universal, free, and equal education and embrace universal healthcare.
Instead, Congress ignored the warning of the Supreme Court. As David Cay Johnston put it: “In place of rules that protect the vulnerable, the innumerate, and the foolish, our government … set forth onerous new rules that reward those who prey on the poor.” 7 Once we prosecuted loan sharks, after 1978 they could charge any interest rate they pleased with relative impunity. Lenders could charge rates and even impose penalties that only a generation earlier had been obscene and illegal.
Another institution that thrived in the wake of the 1978 ruling was the payday loan. With no caps whatsoever on interest rates, and with many workers unable to last between paydays without short-term borrowing, the payday loan emerged as a “solution.” But this made the situation of workers even more precarious: interest rates on these loans could rise meteorically, especially if there was a late payment, to over 100%. There were after all no caps.
The abolition of usury laws produced the inevitable result. Over the next three decades or so, one American family in seven sought relief from debt and creditors. As Elizabeth Warren , then at Harvard Law School, and her associates found, the vast majority of those seeking relief did so not to game the system but because of job loss and major medical problems. The same study found that more than 50% of personal bankruptcies were because of medical debt. The chaos of the Great Recession also boosted personal bankruptcies, more than 1.41 million were declared in 2009 alone as many people lost their jobs and homes: because of the overall economy to be sure, but also because they were overloaded with personal debt acquired well before the Great Recession . 8
What many people found out when resorting to bankruptcy was that they had less protection than rich people. When Wall Street got into trouble, the government preached that they had to be bailed out or the world’s financial system would be at risk. Moreover, laws protect the rich who run the corporations through limited liability and also because of the ease with which they can shed debt by invoking bankruptcy laws. Wall Street therefore has an out, and government is there presiding over the ruins just in case, as it did in 2008–2009.
Consumer credit card debt, however, as it rose in the wake of the virtual elimination of usury laws, could not be so easily discharged, especially after another bankruptcy iteration of 2005. In that law, passed after the credit card industry had spent nearly $100 million lobbying for it for almost a decade, Americans found many barriers discouraging them from filing for bankruptcy, precisely what the credit card industry had lobbied for. Under Section 101 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, bankruptcy courts could unilaterally—or urged by a “party of interest”—dismiss “complete liquidation” of debt. Under Section 102, the standard for “substantial abuse” was lowered to “simple abuse.” 9 The net effect was to make personal bankruptcy more difficult to obtain by far, discouraging up to 20% of potential filers. Once again, legal protection was afforded to the rich, but not to those who needed it most. As for the effective nullification of usury laws that had been a major contributing factor to bankruptcy, these remained as they had been for decades. The fresh start that was supposed to be mandated by constitutional provisions on bankruptcy had been effectively shelved, putting the jobless and the sick at the mercy of their creditors.
One of the very rich who didn’t need a fresh start—he was protected by bankruptcy laws because of his membership in the financial elite—was none other than Donald Trump . When he opened Trump Plaza for business in Atlantic City in 1984, he celebrated his investment as the “finest” building in Atlantic City and possibly the nation. As Robert Reich tells the story, “Thirty years later, the Trump Plaza folded, leaving some one thousand employees without jobs. Trump, meanwhile, was on Twitter claiming he had ‘nothing to do with Atlantic City’ and praising himself for his ‘great timing’ in getting out of the investment.” 10
The super-rich don’t have to worry about bankruptcy because they are protected by limited liability and bankruptcy laws. But borrow from the banks and financial institutions of the super-rich and they will remind you that you have a legal obligation to honor your debt since you had the privilege of borrowing from them. Never mind that the burden of risk has been shifted away from the banks to the consumer, which was the intended consequence of abolishing the usury laws to begin with, and never mind also that usury laws were not restored later when banks could borrow much more cheaply themselves.
Look closely at the financial and mortgage meltdown of 2007–2008 and you will find weakening safeguards going back for decades that led to increased speculation and unmanageable risk, much of it shifted onto the most vulnerable. Changes in the rules created the crisis. In the decade of the 1980s, the Securities and Exchange Commission (SEC) diluted and effectively neutered insider-trading rules that had treated company stock buybacks as insider trading. Just as shamefully, when a corporation decided to buy its own shares, this decision did not have to be communicated publicly for thirty days: which might sound like insider trading to those not in on the secret maneuver. Such rule changes encouraged buybacks by corporate executives because this was the technique that inevitably led to a rise in share value: the value of a corporation would be the same, but now it was divided among fewer shares. When this was increasingly linked to CEO and executive pay for performance, it did not require much insight to see the incentive to artificially raise share prices through buybacks.
In the decade of the 1990s, the SEC eliminated complex disclosure requirements regarding communications between shareholders, making it more difficult to litigate insider-trading violations. In 1993, Congress changed the tax code to provide an incentive to companies to pay executives according to their “performance,” completing the process begun in the 1980s. 11 The problem was how to measure performance. Many executives decided that rising stock prices were a fair barometer of their managerial skills. So the question then became: how best to raise share prices. The answer seemed clear enough, it had already been giftwrapped by Congress. With minimal disclosure requirements, and with executive income tied directly to share buybacks , the incentive was irresistible. All corporate executives had to do to give themselves an income boost was to use company cash to buy their own shares. The inevitable rise in share price was a windfall for the corporate super-rich. They could unload their shares at however much their price inflated.
But there was also an implicit tax break in all this or rather a new kind of tax evasion. Bill Clinton had sought to cap executive earned income. But the new form of income enrichment came in the form of much lower taxed capital gains, which fell to 21.2% in Clinton’s last years in the White House and subsequently were lowered to 21% or lower in subsequent years, until rising to 25% in the latter years of Obama’s presidency. By comparison, the top bracket for earned income remained fairly steady, at 39.6%. 12
Executives found the loophole, shifting more and more of their income to lower-taxed capital gains and away from higher-taxed payroll income. As a result there was little or no relation to performance, executive compensation exploded upwards regardless of the trajectory of their companies. In the meantime, executives’ rising incomes would only be subject to much lower capital gains taxes, which in turn elevated tax bills for everybody else.
These arguments completely fail to justify what amounts to corporate corruption. If executives— and the bankers, consultants and lawyers who advise them—are permitted to profit from inside information in this way, it makes a mockery of fairness and undermines the legitimacy of financial markets. 13
The use of a growing array of derivatives and the related application of more sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial institutions. … As a result, not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient. 14
Greenspan apparently had suffered a serious lapse of memory. It had only been a few years since the savings and loan fiasco, when customers’ savings had been looted by executives such as Charles Keating , who had been reimbursed at a cost of $256 billion to the taxpayer. Greenspan also insisted that like-minded deregulators be inserted into other slots in Washington: men like Christopher Cox , for example, who was appointed head of the SEC in 2005. Cox was an ideologue in the truest sense, so extreme in deregulating that he was watched by the USA’s Government Accountability Office (GAO) . It concluded that Cox had consistently disrupted investigations of stock manipulation, weakened enforcement, and minimized fines. 15 SEC fines and penalties fell 84% during his tenure. 16
There was one man who understood the need for greater prudence in regulating the finance industry, Arthur Levitt , Jr., who was appointed chairman of the SEC by Bill Clinton . Levitt was not a foolish mongoose type like Greenspan. Having run the American Stock Exchange for years, he understood the dangers and also the potential solutions to the pervasive greed of Wall Street. He knew that competition thrived only when paired with prudent regulation. Levitt had learned that accounting firms were negligent watchmen because they had an incentive to ignore the deceit on Wall Street. The reason was obvious: they had a lucrative consulting business with the same firms they were auditing, a disincentive for effective oversight and a conflict of interest that should have set off a high-decibel alarm. Levitt had a simple proposal: prohibit auditors from consulting with the same firm they were auditing, freeing the accounting firms to make full disclosure. As George R. Tyler summarized Levitt’s solution: “Rather than being paid to overlook problems, they [accounting firms] would be paid to spotlight firms mispricing risk, holding inadequate reserves, or hiding liabilities on off-balance-sheet-affiliates.” 17
Levitt’s solution made sense too many, why not use market expertise to make markets more efficient and fair: full disclosure, in other words, by incentivizing legitimate audits. One might go further: why resort to a market solution when the government could change other rules like imposing criminal charges for committing fraud or hiring more government auditors? But Levitt never got the support he needed for his sensible proposal, least of all from Greenspan. And accounting firms, standing to lose many millions in consulting fees, were among those lobbying against anything sensible if opposed to the interests of the super-rich.
The Repeal of Glass–Steagall
Bill Clinton promoted himself as a kind of populist president . Nevertheless, he also pursued many policies that were concessions to Wall Street, not Main Street. He was committed to reducing the federal budget deficit largely as a gift to Wall Street bond traders, who prosper when government buys back its debt. Hence, he raised taxes but then slashed the federal budget, getting rid of Aid to Dependent Children altogether. Clinton also did his best to dismantle many of the financial regulations devised by Franklin Delano Roosevelt to control the excesses of Wall Street. In 1994, Clinton and the Democrats supported the Interstate Banking and Branching Efficiency Act , effectively eliminating all restrictions on interstate banking, making it possible for the birth of the mega-banks. In 1999, Clinton pushed for what amounted to a revolution in banking, the repeal of the Glass–Steagall Act, which had separated commercial and investment banking since 1933.
It is widely believed—though disputed—that the latter act, the repeal of Glass–Steagall in November 1999, was responsible for the Great Recession meltdown of 2008–2009. Though the repeal was not the only factor in the eventual collapse of the banking and financial industry, it was at the least a huge gift to the financial industry and an example of rent-seeking of monumental significance. The repeal of Glass–Steagall , the result of a sustained $300 million lobbying effort by the financial services industry—led by Citibank—was spearheaded in Congress by Senator Phil Gramm . Glass–Steagall had, since 1933, separated commercial banks, which lend money, from investment banks, which underwrite the sale of bonds and equities. One of the main purposes of Glass–Steagall had been to prevent conflicts of interest. Without a firewall between investment and commercial banks, as Joseph Stiglitz has noted, an investment bank would be tempted to pressure a commercial bank, if it had one, to lend money to any company whose shares had been issued by the former. 18 The possibility of fraud was obvious since investment banks had an incentive to support the commercial banks they had merged with by keeping them afloat.
But there were other important consequences of the repeal of Glass–Steagall , notably the transformation of a whole culture and understanding of the purpose of banking. Commercial banks are managers of people’s money, not high-risk adventurers speculating with the money of depositors. They are supposed to lend money for mortgages and to business entrepreneurs, and to minimize risk. It was because of this limit on risk, and the avowed purpose to avoid it, that the government agreed to guarantee commercial banks against failure. Armed with government backing, the public could be assured that its deposits would not be at risk and that banks were solid and safe.
Investment banks, however, have an entirely different function. They have historically managed the money of wealthy people who can sustain losses and therefore tolerate higher risks as the cost of greater (potential) returns. When investment and commercial banks came together, the new culture inevitably favored investment banks. They now had access to other people’s money as they never had before. 19 Moreover, once investment banks became “banks,” they also had access to the Treasury window, normally a privilege accorded only to commercial banks. And as banks they also had the assurances that commercial banks had. Government would be there to bail them out if their bets went bad. The same assurances that applied to commercial now applied to investment banks. By law, the taxpayer was committed to save speculating millionaires and billionaires.
Bank Deregulation Continues: Derivatives and Beyond
Under President Clinton the deregulation religion of the Republicans became the mantra of the Democrats, also, almost exactly in tandem with what was happening in the UK, first under Margaret Thatcher and John Major of the Tories , and then Tony Blair and Gordon Brown of Labor. In 2000, Clinton failed to oppose the Commodity Futures Modernization Act , which prevented the CFTC from regulating over-the-counter derivative contracts, including Collateralized Debt Obligations (CDO) and Credit Default Swaps (CDS). The former provided an opportunity for investment banks to put together complicated securities that were highly risky and then to offload them to institutional buyers looking for high returns. Alternatively, investment banks could keep CDSs on their own balance sheets as a hedge: CDSs were in effect insurance policies that paid off if CDOs went south. It seemed a foolproof scheme, but it was the deregulated derivative market that was one of the chief factors in the eventual meltdown of the US financial system.
An obscure provision in the Commodity Futures Modernization Act stipulated that no regulator could regulate or touch derivatives regardless of the peril to the economy. And peril there was. A leading cause—if not the leading cause—of the credit crisis in 2007–2008 was uncertainty over insurance company American International Group ’s (AIG ) losses, which it suffered from issuing CDSs, which insured losses from other kinds of derivatives, especially CDOs that were mortgage-backed securities, typically based on fragile sub-prime loans. AIG ’s bet was that it would never have to redeem the CDSs it had issued.
The leading cause of the credit crisis was widespread uncertainty over insurance giant AIG ’s losses speculating in credit default swaps (CDS), a kind of derivative bet that particular issuers won’t default on their bond obligations. Because AIG was part of an enormous and poorly-understood web of CDS bets and counter-bets among the world’s largest banks, investment funds, and insurance companies, when AIG collapsed, many of these firms worried they too might soon be bankrupt. Only a massive $180 billion government-funded bailout of AIG prevented the system from imploding. 20
It doesn’t matter if AIG eventually paid the money back. The point is that CDS derivatives were just bets. The banks that made them were not required to have an insurable interest to purchase a CDS. Many just bought a CDS because they knew that if the mortgage market collapsed, banks holding CDSs stood to gain hundreds of millions or even billions of dollars. Others who bought CDO derivatives bought the insurance policy (CDS) because it minimized risk, or even eliminated it. When the government decided that contracts had to be made good, or the house of cards would collapse, it honored the derivatives (CDS) contracts, earning immense profits for the speculating banks.
But that was not the end of government welfare for the super-rich. The same provision that prevented regulation of the derivatives market also gave derivatives claims seniority in the event of bankruptcy. If a bank collapsed, claims on the derivatives would be paid off before workers, suppliers, or even other creditors could make a claim: it didn’t matter if the derivatives had caused the bankruptcy of a company to begin with. When AIG collapsed and the government anteed up $180 billion of taxpayer money, it was acting to help make whole the contracts held by companies like Goldman Sachs . 21
In April of 2004, with George W. Bush in the White House, yet another step down the path of deregulation was taken, indicating that Wall Street had seats at the highest levels of government. The SEC , at a meeting that was widely overlooked and tragically ignored, made a decision to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so they could buy mortgage-backed securities. 22 This inevitably inflated the housing bubble in the process, ramping up investment bank leverage considerably and fueling even further the notoriously fragile sub-prime mortgages that were the bases of the securities. Most neutral observers would have caught the deceit, but the SEC argued otherwise. It proffered the virtues of self-regulation and the argument that the banks could regulate themselves. Self-regulation was a myth; at the least it ignored the truths about human nature, although it would clearly be imprudent when speculation offered the possibility of unlimited riches: especially when the rules indicated that the government would bail out any and all institutions that were “too big to fail,” especially when the rules allowed institutions to shift risk to taxpayers, pension funds, mutual funds, and institutional buyers of securities, all of them interested in the payoffs that seemed so inevitable, unaware, or deceived that they were buying securities that were high risk, much higher risk than was publicly acknowledged or admitted.
The decade of the 1990s was one of the most corrupt decades on record in the financial sector. Riding the dot.com boom, investment banks routinely issued buy advisements to investors for companies that they were lending to and that they were helping to bring public. The boom lasted for more than a decade. The fees and commissions for the brokerage companies were almost incalculable, driving up the stock prices of the investment banks as well, which also had income implications for the CEOs benefiting from the escalation by cashing in stock options . Even this corner of finance was corrupted as Initial Public Offerings (IPOs) were routinely kept lower than their real value so they would obtain (likely) large increases following their initial sale. This was an enormous gift to the executives and others who were granted allocations of an IPO, and it also generated kickbacks to those organizing the sale.
Jeff Madrick followed all this in detail. Though he acknowledged that the losses borne by investors due to the activities of the 1990s and early 2000s were difficult to calculate, he estimated that the losses on money invested in high-tech companies, especially the dot.coms and the telecom industry, amounted to a sum running to nearly $3 trillion. The collapse of Enron, WorldCom, Global Crossing, and Tyco and Adelphia, all of which went bankrupt, came to another trillion dollars. A portion of the sums was the winnings made during the speculative boom, but a large percentage of this money had been kept out of productive activity. Had it been invested more productively, fewer jobs might have been lost, and the manufacturing sector might not have suffered the precipitous losses that would occur later in the next decade. 23
Misrepresentation by investment banks as to the real value of many of the dot.coms and the stocks in the telecom industry led to accelerated speculation and to large amounts of wasted investment. Speculation and overinvestment in telecoms were significant and often based on outright deception. The overselling of this industry alone, according to Madrick’s estimation, led to a minimum of $100–150 billion in superfluous investment. Far greater sums of money were wasted on the purchase of these overinflated companies’ shares. 24
The practices of outright deception—keeping debt off balance sheets, inflating profits for personal gain—were widely documented by Attorney General Elliot Spitzer in New York in the years following the turn of the century. When his investigations ended, he concluded that deceitful investment practices were widespread. The SEC , NASDAQ (NASD), and the New York Stock Exchange, with Spitzer in the lead, got ten firms to agree to a settlement for their deceptions: the sum was $1.4 billion. Citigroup , led by Sandy Weill , paid the largest fine, $400 million. Moreover, the SEC separately charged Citigroup for helping Enron and Dynegy inflate their profits and underreport their debt. Citigroup , in July 2003, admitted culpability for its Enron and Dynegy activities and paid $101 million and $19 million respectively for those transgressions. A class action suit by WorldCom investors cost Citigroup another $2.6 billion in May 2004, and suits brought by Enron shareholders cost Citigroup $2 billion when it was settled in June 2005. Despite these losses, Citigroup earned $16 billion in 2002 and could easily afford the fines. As for Sandy Weill , he was personally worth somewhere between $1.5 and $2 billion in 2002, hardly a sum that seemed a proper punishment for the losses sustained by so many of the public victimized by his company. 25
The fines and litigation losses paid by Citigroup and other investment banks were slight, especially when measured against the kickbacks and payoffs that had contributed so much to the stock market and dot.com bubble in the late 1990s and early 2000s. Following the 2000 crash, nearly all the many thousands of IPOs that had made a fortune for Wall Street in the late 1990s had fallen below their initial offering prices. Of the surviving companies, many were close to bankruptcy. Of those that had survived, half were selling for less than a dollar a share. The founder of Vanguard Funds, John Bogle , summed it up best when he estimated that the CEOs and top executives of both established companies and those recently taken public had earned more than $1 trillion when they sold their shares during the bull market of the late 1990s. He concluded further that fees and commission payments to investment banks, brokers, and mutual funds totaled at least another $2.275 trillion. Bogle then raised an interesting question: “If the winners raked in what we roughly can estimate as at least $2.275 trillion, who lost all the money? The losers of course were those who bought the stocks and who paid the intermediation fees … the great American public.” 26
Americans were told that they were buying shares of great value, the proof was in the ratings system that told them so. But Americans were never told that the raters were beholden to the financial houses that provided them with so much lucrative business. Bankers in America were no longer in the business of lending to clients who wanted to buy homes or other assets. They were now financiers looking for the highest return in the global market, more interested in turning loans into assets that provided permanent income, not in liquidating the loan and shifting the asset to the buyer.
We have already met the man who stood at the helm during the era of deregulation , Alan Greenspan . It was Greenspan who argued that markets worked best when the government got out of the way, even though he knew that without government there was no market. Greenspan was an ideologue, and he really believed that the market did best when deregulated. Reality never discouraged that belief. Just weeks before the fall in 1998 of Long-Term Capital Management (LTCM), the largest hedge fund in the USA, which collapsed because of excessive borrowing, Greenspan argued that hedge funds were effectively regulated by their lenders. Lenders, after all, were rational people, and they would never tolerate dangerous levels of debt to their clients for the simple reason that this was irrational. But Greenspan should have known better. Hedge funds were not regulated. They did not have to disclose their debt or borrowing positions. As a consequence, lenders to LTCM were unaware of the debt the hedge fund held.
In 1999, a year after the collapse of LTCM, Greenspan demonstrated how little he had learned, or understood, when discussing the regulation of financial derivatives with the head of the Commodities Futures Trading Commission. Greenspan argued, against logic and history, that unrestricted derivatives trading would stabilize finance, not cause a collapse of the financial markets. At the turn of the century, after LTCM had gone bust, Greenspan had no idea that the relatively new derivatives market, especially mortgage-backed CDOs , could be a principal source of risky investments in the noughties, the decade of the 2000s. As Jeff Madrick put it in The Age of Greed, “It never occurred to him [Greenspan] that investment banks were now creating loans just like the commercial banks he oversaw, but this shadow banking system was not regulated by the one agency designed to make sure US credit was strong, his own.” 27
Greenspan adhered to his low regulation, low-interest, free market philosophy throughout his tenure, despite the mounting signs of endemic crisis. Under Greenspan’s lead, banks and financial institutions were freer from government oversight than at any time since the 1920s. Even though the late 1980s and the decade of the 1990s and beyond fell into perpetual crisis, Greenspan saw no reason to adjust his philosophy. This was despite the stock market crash of 1987, the thrift crisis of 1989, the collapse of junk bonds in 1990, the derivatives crisis of 1994, the Asian crisis of 1997, the failure of LCTM in 1998, and the stock market crash of 2000, ending the dot.com bubble that had transferred so much wealth to the high-tech sector of the economy.
What all these crises had in common were speculative binges caused by the stimulating monetary policy of the FED and regulatory neglect. The result was over-speculation based on easy money that encouraged banks and financial institutions to borrow and take on massive debt. In the decade of the 1980s, the takeover movement was based on soaring levels of debt, finally rising to levels that were not manageable and that ultimately led to chaos. In the late 1990s, hedge funds borrowed aggressively at low-interest rates and then sent American capital toward Asia in pursuit of much higher interest rates. The results should have been expected: markets rose irrationally and then virtually collapsed in a wave of defaults caused by excessive interest rates. US technology stocks also rose to irrational levels until the bubble burst. So did housing prices, which rose faster than at any time in modern history as Greenspan kept interest rates low to stimulate the economy after the collapse of the dot.com bubble. 28
Lost during all these crises, and imperceptible to Greenspan, were the accelerating mountains of debt: consumer debt, business debt, government debt were all rising twice as fast as the nation’s income. Nor did Greenspan and other free market, deregulation devotees—including President Bill Clinton and Secretary of Treasury Robert Rubin , and Larry Summers —notice or care that much of the income increases, lagging well behind the nation’s spending, was already going to the top 1%, especially the top 0.1%, a trend that would accelerate over the next decade and a half. There could only be one conclusion, though it would take the Great Recession before Greenspan would concede this. Not only had his free market ideology failed, but it had masked the larger truth that deregulation was the cause of one of the greatest transfers of wealth in history. Stimulating the market while deregulating it, providing cheap capital to banks and financial institutions with few restraints on how to employ that capital, allowing unregulated derivatives which encouraged unchecked speculation on new kinds of mortgage-backed securities that were themselves based on poor-quality sub-prime loans, was sure to fail. Once commercial banks and large investment banks were allowed to merge—as they were after the repeal of Glass–Steagall —what was to keep banks from making relatively cheap loans if they could offload those loans onto the investment banks. And why would the latter care if they could offload these same loans by packaging them into mortgage-backed securities—repackaged as CDO derivatives—and then selling them to European banks or to pension funds and other institutional buyers.
The whole point was to shift risk, while avoiding it for the banks. But we know that the banks also hedged against the possible (or probable) collapse of CDOs by purchasing another derivative, the CDS , which could be redeemed if CDOs failed. Knowing in advance that the derivatives they had offloaded to institutional buyers would likely fail when sub-prime loans reset, making loans unaffordable for millions and leading to a wave of defaults, financial institutions snapped up CDSs, as they legally could. The result was catastrophic when sub-prime loans did reset: millions of families lost their homes—14 million and counting—as the escalating cost of sub-prime mortgages put monthly premiums beyond the reach of many ordinary families. Once again, financial institutions, speculating with other people’s money—legal because of deregulation —had shifted risk to those who could least afford it, siphoning off billions in wealth for themselves if they had hedged by buying CDSs, or relying on the largesse of the government to bail them out because they were too big to fail.
Of course financial institutions lost, too, consider Lehman Brothers. But this was unique. In the end, Wall Street was saved despite pursuing fraudulent practices. The same could not be said for the millions of homeowners who could not rely on the government for their salvation. With great irony, taxpayers, largely treated with contempt by the big investment banks, ended up saving the institutions that had betrayed them.
Markets require other social institutions to support them. They rely on courts and legal arrangements to enforce property rights and on regulators to rein in abuse and fix market failures. … In other words, markets do not create, regulate, stabilize, or sustain themselves. The history of capitalism has been a process of learning and relearning this lesson. 29
Rodrik was hardly alone. Ben Bernanke , as FED chairman, had uttered much the same sentiment a year earlier in 2010. Diagnosing the problem in a speech given in Atlanta, he blamed the deregulation policies of Alan Greenspan , his predecessor, for the Wall Street meltdown of 2008–2009. Speaking bluntly, Bernanke argued that stronger regulation would have been a more effective approach to constraining the housing bubble than an increase in interest rates. 30
But we didn’t know the full extent of the moral depravity of the banks, of their willingness to engage in exploitive practices, or their recklessness. … We didn’t know of the sloppiness in their record keeping, in their race to write an ever larger number of bad mortgages. And we didn’t know the full extent of fraudulent behavior, on the part not just of the banks but of the credit-rating agencies … Competition among rating agencies to provide a high rating had led them to deliberately ignore relevant information that might have yielded a more favorable rating. 31
The worst problem was that banks knew they were “too big to fail.” That was why they had worked so hard to get Glass–Steagall passed in 1999. This legislation tore down the firewall between investment and commercial banks, making it possible for the first time for investment banks to tap free money at Treasury, to which they now had access. That was why they took the risks they did, and they now had the same government guarantee that commercial banks had. And that was where government welfare for bankers came in. The bankers knew that if their bets paid off they would keep the profits, but if they lost the taxpayer would clean up the mess.
Which also prompted Dodd–Frank , the financial sector reform bill of 2010, intended by its authors to rectify the excesses of the bankers. But this reform bill never had much of a chance. It did nothing to solve the “too big to fail” problem. It failed to reverse the growth of banking conglomerates. The government even made some banks merge, giving them greater market power than ever. The one success that Dodd–Frank did have was in limiting the ability of federally insured banks to write derivatives, the same products that led to the collapse of AIG and the unprecedented bailouts of 2008–2009. There was disagreement about the value of derivatives, but a widely shared view was that they never should have been provided by lending institutions or insured by government. Unfortunately, what came next revealed how little the desire for reform impacted on Congress. With language written by Citibank, even this provision was struck down in 2014 and with no Congressional hearings. 32
“The Best Way to Rob a Bank Is to Own One” 33
President Reagan put his famous deregulating playbook into action early, unleashing executives to participate in a Gold Rush. In 1982, as one example, he signed the Garn-St. Germain Depository Institutions Act into law, declaring as he did so that the bill was the most important legislation for financial institutions in the previous fifty years. The new legislation, he said, provided a long-term solution for troubled thrift institutions. He concluded that “we had hit the jackpot.” This was ironic, but if the pronoun had been changed to “they,” the 0.1%, Reagan would have been correct. He had just opened up Fort Knox for the privileged few. Savings and Loan (S&L) executives soon were able to carry off their deregulated treasure without the oversight that might have deprived them of participation in the robbery of their own banks.
Garn-St. Germain stripped away oversight that could have prevented what soon followed: S&L executives making unwise loans to themselves, their wives, and their cronies and allies. The S&Ls, or thrifts as they were ironically called, now had carte blanche to borrow and invest in commercial real estate, junk bonds, and any suitable temptations that pleased them. Edwin Gray, a California Republican who was the director of the Federal Home Loan Bank Board under President Reagan, agreed that self-regulation was culpable, the cause of the neglect which produced the meltdown. He observed that the Reagan White House was full of ideologues, who argued that the best way to solve the problem, any problem, was more deregulation : de facto, this meant fewer bank examiners, allowing for more “wheeling-dealing.” 34 Reimbursing customers for deposits that had been looted by S&L executives—like the notorious Charles Keating —in the 1980s eventually cost taxpayers $256 billion (in 2008 dollars). Here, George Tyler noted was a precursor to the Wall Street bubble and meltdown of 2007–2008, which cost the taxpayer the equivalent of 2% of GDP. 35 Eventually, during the financial crisis of 1987, in the wake of the deregulation of the S&Ls, bad loans given to board members and other officers bankrupted 747 institutions. But even this was not enough to prevent the crises that loomed ahead. Regulatory capture, especially in the financial sector, was now the official religion of Washington, which led to the continuing flogging of regulation. 36
Regulatory capture has meant a revolving door between industry and government. One infamous illustration of this was Wendy Gramm , wife of former Republican Senator Phil Gramm and the chair of the CFTC under President George H. W. Bush in the early 1990s. The CFTC was in a particularly sensitive position because it “regulated” financial derivatives as well as the market for commodities like oil, gold, and cotton. In her capacity as chair, Wendy Gramm led efforts to deregulate energy derivatives, prior to her joining the board of Enron, which netted her a handsome million-dollar payday. It was CFTC deregulation (regulatory capture) that enabled Enron to post spectacular profits prior to its infamous speculative collapse. The officials at Enron certainly knew what they were doing when they brought Wendy Gramm to the board, but it was revealed later that they had other reasons to celebrate. Before she left CFTC as chair, she obtained a promise from one of the chief administrative judges who issued rulings affecting CFTC, and therefore derivatives, that he would always rule against the complainant. Translated, this meant he would adhere to the continuing deregulation of derivatives. The judge, court records revealed, kept his word. Enron, which specialized in energy derivatives, continued its trade, largely in the regulatory shadows. Profits were easy, clients unsuspecting, and deregulation made it easy to shift risk to ignorant investors. 37
The year 1994 was one of heavy losses for companies speculating in derivatives, but losses were concealed by keeping them off the balance sheets—easy to do because of the deregulating mania. However, the GAO now made a recommendation to regulate them. Jim Leach, at the time the ranking Republican on the House Banking Committee, even demanded regulation. But the ten leading dealers of derivatives, including Citicorp, Goldman Sachs , and Merrill Lynch, blocked the proposed legislation. 38 Derivatives remained as lethal and unregulated as they had always been, providing a clear path for Wall Street to continue its wanton speculation in the shadows.
Irresponsible accounting practices, aggressive and unregulated trading, and the pressure on federal agencies to absent themselves from their oversight role led directly to the Enron debacle, ultimately costing the taxpayer and investors billions of dollars. Formed in 1985 by combining a natural gas and an electricity company, Houston Natural Gas and Internorth, the company was run by Kenneth Lay and Jeffrey Skilling , a Harvard MBA who embraced the company’s “innovations”—which would eventually lead to its destruction. Traditionally, energy—oil, natural gas, and electricity—was bought and sold by regional or local companies. Skilling’s innovation was to use the new derivatives markets to abolish the physical limits of energy. To succeed, Enron lobbied for the deregulation of electric energy prices, which were normally fixed by state governments. It took a few years, but in 1996 Enron got the consent it wanted. Enron’s argument that the deregulation of electricity—oil and gas futures had long been deregulated—would force energy providers to compete and lower costs for consumers led to a new mandate. Local utility companies were now required to transmit the energy of their competitors through their utility lines for a fee if requested by customers. 39
Skilling would employ the new rules to his considerable advantage, using derivatives to buy and sell energy, which he then sold to local communities. The futures contracts were complicated, but Enron traders were adept, especially since the derivatives used for the financing were used with the expertise and support of Wall Street. The contracts enabled a buyer to place an order in the future at an agreed price in the present, or the seller to arrange a sale in the future at a set price. Using the commodity futures market, Enron promised a town or customer a specified price up to thirty years in the future and then hedged its costs by trading in futures contracts that enabled it to lock in a future price for energy. 40
The scheme seemed flawless; at least, it appeared so to the Enron executives and their traders. The fact that the objective was fraudulent, based on the manipulation of the market, and the creation of scarcity—to establish near-monopoly conditions that favored Enron, infamously creating rents—did not trouble Skilling and Lay and company. Armed with their deregulation rule, Enron activated its plan. It made the electricity shortage in California in 2000 seem even worse than it actually was by selling electric energy out of state. When the price of electricity in California inflated quickly, Enron sold it back to California at a huge profit—so great, that Enron felt compelled to conceal it. 41
Accounting firm Arthur Andersen was right there to help them hide their profligate earnings. It simply reduced them by shifting the windfall profits into the future. Enron traders, who apparently thought of their adventures as minor peccadillos at the worst, were seen in a documentary rejoicing over their public swindles—and the profits they produced—while electricity prices in California soared. Countless businesses were shuttered, and untold numbers of households did without electric energy. 42 Enron generated some $3 billion in profits in the first three quarters of 2001, but by the end of the year disaster struck. What brought down Enron, why did the celebration come to an abrupt halt? The answer was the unethical financial schemes that had been created on Wall Street: Enron had an active partnership with firms like Citigroup , which helped facilitate many unwise decisions made by the company. With cheap funds available, Enron invested in oil and natural gas pipelines and energy plants around the globe. It made venture capital investments in high tech. Everything was financed with borrowed money, usually concealed off the balance sheets with the active collaboration of Citigroup , JPMorgan Chase , Merrill Lynch, and other financial companies. 43
JPMorgan Chase and Citigroup devised what appeared to be ingenious methods to provide financing to Enron. They developed and promoted a device known as a prepay swap, a complex derivative trade that was a loan that never appeared on the accounting books. Citigroup lent almost $4 billion to Enron using these swaps. JPMorgan signed for even more such transactions. 44 Wall Street, seeing a cash cow that would benefit the Street, began to tout Enron stock. And why not? Wall Street banks were now invested in the company directly and stood to make large fortunes in fees, commissions, and interest.
Meanwhile, Enron pressured Wall Street, reminding the Street it had provided hundreds of millions in underwriting and loans to Wall Street banks. Any bank which questioned Enron or lacked enthusiasm, such as Merrill Lynch and Citigroup , found themselves pariahs, punished because Enron started to withhold underwriting business until enthusiasm could be rekindled. 45 The fact that Enron was committing fraud and that Wall Street was willing to conceal that fraud did not seem to register.
The scheme inevitably failed. The reason was that Enron’s stock, which was always being artificially pushed up based on misrepresentation of its assets and cooked balance sheets, was used as collateral for its loans. If the stock fell, the value of the collateral fell, and Enron would have to borrow to buy more stock. The higher stock price then enabled Enron to borrow more against the stock. Ultimately, Enron was caught in a vacuous circle. In 2000, Enron claimed $100 billion in sales and $13 billion in earnings. The company’s stock price had tripled in three years, to $90 per share in August 2000. Skilling attached high valuations to the company, without supplying the data to warrant his claims. He argued that Enron shares were worth $126. One analyst at Goldman Sachs obliged his projection by saying he expected Enron to reach $110. In October 2001, just prior to the collapse, sixteen of seventeen analysts who followed Enron awarded it with a “buy” or “strong buy.” In the same period, Kenneth Lay and Jeff Skilling made a fortune by selling their shares: Skilling alone made $76 million. 46
When the high-tech boom began to bust in late 2001, many of Enron’s investments went south. The $1 billion in losses from partnerships that Enron had entered, losses that had been kept off the books, now surfaced. Enron’s stock began to fall, and as it kept falling, Moody’s credit rating agency began reassessing its rating of Enron’s debt. As Enron shares continued to collapse, its reportable losses rose, putting even more pressure on the tumbling shares. Despite what now looked like a freefall and calamitous fraud, Citigroup and JPMorgan Chase demonstrated that greed had no limits on Wall Street: neither did shamelessness. Both banks offered a massive loan on condition that Enron would give them all of its future underwriting business. Since they had billions on the line, it might be understandable that they wanted to protect against losses. But they attempted to influence the ratings agencies to postpone a downgrading of Enron, a decision that was clearly unethical and fraudulent. Robert Rubin , future Treasury Secretary under Bill Clinton , called a Treasury official and requested a delay, claiming that all financial markets could be jeopardized. 47 His request was denied: Enron stock fell from $3 to a dollar the day of the downgrade.
There were many civil suits brought against Enron, its executives and its supporting banks. Ken Lay had sold his total Enron stock over the years, earning him a nice bit of treasure, $144 million. Andy Fastow, the chief financial officer, had earned $30 million. Fastow made an additional $45 million, at least, from various partnerships he had entered into for Enron. The largest of the civil suits, which was a class action brought by shareholders, recovered $7 billion, a sum that was far less than what Enron employees had been induced to invest in the company. Citigroup paid $2 billion in claims for misleading shareholders, while JPMorgan Chase paid $2.2 billion. The SEC fined JPMorgan and Citigroup $300 million each. 48
Enron’s October 2001 bankruptcy was the largest in US history. The firm had $63.4 billion in assets on its books prior to the bankruptcy: other than what was recovered in litigation, as noted above, shareholders still suffered between $45 and $50 billion in losses just related to fraud. Employees at Enron suffered the most: more than $2 billion in pension funds simply evaporated. When the disappearance of 20,000 jobs is factored in, the losses of workers, investors, and pension holders were almost incalculable, a supreme illustration in the annals of American capitalism, of how Wall Street squandered resources, while attempting to extract as much wealth for itself as possible, in this case from investors and employees. 49
Monopoly Restored: How Big Banks Became Bigger
There were many tools that the Street had accumulated over several decades that helped banks evade regulatory oversight. These included a long list of favors from Congress that had made possible a shadow banking system, which could largely make up its own rules. This could only have happened in the absence of anti-trust policing, but government not only failed to do this, it even bailed out Wall Street in the aftermath of the financial and mortgage collapses of 2007–2009. Derivatives remained largely unregulated and remained so even after 2008, which only encouraged speculation further. Hedge funds weren’t regulated. Debt ceilings were high, encouraging even more speculation. The repeal of Glass–Steagall opened the Treasury window for investment banks, and it tore down the wall between commercial and investment banks, allowing the latter to make bets with other people’s money.
Armed with the rules and influence at the highest levels of government, having effectively neutered resistance, while fruitfully inserting itself into power, Wall Street not only survived the 2008 near meltdown, it positively was thriving again by 2014. In that year, Wall Street’s five largest banks held 45% of America’s total banking assets, almost doubling the 25% that the top five held in 2000. These companies virtually took most companies public, were involved in almost all US mergers and acquisitions—such as private equities—and were involved in many abroad. They were responsible for almost all trading in derivatives and complex financial securities. Wall Street’s largest banks provided the largest financial rewards, the biggest bonuses, and attracted some of the smartest people. For thirty-four years, between 1980 and 2014, the financial sector of the economy was not only the fastest growing sector in the USA and in the UK, it was growing six times faster than the US economy overall. 50
As the financial power of the biggest Wall Street banks grew, so did their political clout. Wall Street became one of the largest contributors to political campaigns, for both Republican and Democratic candidates. In 2008, the Street was fourth among all industry groups supporting candidate Barack Obama and the Democratic National Committee, contributing about $16.6 million to his campaign according to the nonpartisan Center for Responsive Politics. 51 Goldman Sachs employees made more campaign donations to candidate Obama than any other single employee group. In 2012, Wall Street contributions mostly went to Mitt Romney. 52
Wall Street has supplied key cabinet and other positions within both Republican and Democratic administrations for decades, assuring a symbiotic relationship between the Street and government. Robert Rubin and Henry Paulson Jr. were Treasury secretaries under Bill Clinton and George W. Bush , respectively: each had chaired Goldman Sachs before entering government. Rubin then returned to Wall Street after serving in the Clinton administration. Tim Geithner, who served as Barack Obama ’s Secretary of the Treasury, was personally chosen by Rubin to be the president of the Federal Reserve of New York before he joined the Obama administration. Lawrence Summers, President Obama’s chief economic advisor, head of the National Economic Council, and Obama’s favorite for becoming chief of the FED , received hundreds of thousands of dollars in fees from Wall Street firms, some of which were later bailed out in the White House’s bank relief programs. Among these were JPMorgan Chase , which gave Summers a $67,500 speakers fee for a February 1, 2008, engagement, later receiving $25 billion in government bailout funds; Citigroup , which paid Summers a speaking fee of $45,000 in March 2008 and another $54,000 in May of 2008, and later received $50 billion of taxpayer relief money; and Goldman Sachs , which paid Mr. Summers a fee of $135,000 for a speech in April 2008 and later accepted a more modest taxpayer relief sum of $10 million. 53 Since it was widely expected that Larry Summers would enter the Obama administration should Obama be elected president, it warranted the conclusion that Summers would be pliant when it came to regulating the world of finance.
The election of Donald Trump , despite his so-called populist rhetoric during the campaign, promised post-election that Wall Street would retain a front row seat to power. Steve Mnuchin, a former partner at Goldman Sachs, was chosen to be Secretary of the Treasury. Steve Bannon, a former Goldman Sachs trader, was anointed the chief White House strategist, though he made a quick exit some eight months later. Wilbur Ross did not serve at Goldman Sachs, but he was well known as an investor who bought, restructured, and sold companies in the world of private equity . As a billionaire in a government of billionaires, Ross became Secretary of Commerce.
The financial community and investment bankers know better than anybody that power matters. Whoever makes policy can transform rules, and rules determine where the money goes. Wall Street has known this for decades, and as it succeeded in manipulating the rules, its fortunes rose accordingly, extracting hundreds of billions from the economy to its advantage, often at the expense of many others. Correspondingly, wealth and income disparities rose to unprecedented and obscene levels, at the same time that power was flowing toward Wall Street. Relative to the rest of the economy, the financial sector became bloated and profitable, though its contributions to the real economy in which most people lived and worked were dubious.
Prior to the crisis of 2008, financial services comprised 7.6% of GDP, declined to 6.6% in 2012, and then began to rise again, climbing to 7.3% in 2014. These figures might seem modest, but in the decade of the 1950s, when the US economy was growing rapidly, financial services constituted less than 3% of GDP. Between 1950 and 1980, financial services comprised between 10 and 20% of corporate profits, rising to 26% by 1989, leveling out in the 1990s, and then catapulting to a significant peak of 46% in 2001 before leveling to an average of 32% in the expansion of the 2000s prior to the Great Recession . 54 As the financial sector rose in prominence, so did its income rise correspondingly, becoming a major driver of the 1% (actually the 0.1%), which increasingly included financiers, bankers, brokers, and hedge fund managers. Between 1979 and 2005, their presence among the 1% surged by 80%, from 7.7 to 13.9%. Their numbers in the top tenth of 1% were even more dramatic, rising from 11% in 1979 to 18% in 2005, accounting for 70% of the growth in the share of national income of the 1%. As Joseph Stiglitz and economists Thomas Phillipon and Ariell Reshef have argued, this is not only significant, it is unprecedented and largely undeserved. It is the transformation of the rules, not just talent or genius, that explains the surging monetary rewards in the financial sector, compared to non-financial and non-farm occupations. Wages and income in the financial sector share a similar U-shape pattern with growth in overall inequality, falling in the wake of the Great Depression until roughly 1980 and rising since. It is this sector’s ascendance since 1980 that corresponds statistically to deregulation . 55 And it is here that one finds many if not most of the new class of rentier capitalists.
Rules have mattered more than talent, assuming that there were many talented individuals in finance prior to 1980, and as those rules were made more lax, as regulatory capture became more complete, as Congress became more lenient, as individuals moved more freely between government and industry and back again, so did rent-seeking once again surge without corresponding checks, allowing for the super-extraction of wealth from the real economy and into the treasure of big banks and big finance. It was this, concluded Joseph Stiglitz , that allowed for between 30 and 50% of the gains of the so-called innovators of finance to be accrued largely because of their ability to extract from the real economy without adding anything of corresponding value. 56
Reduced Anti-trust Enforcement
The reduction in anti-trust enforcement, which seriously began during the Reagan years, gave birth to the banks that were “too big to fail.” When combined with deregulation , weak anti-trust enforcement made collusion and corruption all but inevitable. The result has been that industry after industry has consolidated into two or three firms, creating oligopolies in the USA and the UK, and revolving door syndromes between government and industry in both countries. Back in the eighteenth century, Adam Smith had understood that the business community greedily conspires against consumers, employees, and the public interest by minimizing competition, which it did by establishing conditions of monopoly or oligopoly. The result of reduced competition brought about by near monopoly or the elimination of competition was higher prices, less innovation, and a reduced variety of goods. Consumers in contemporary America and Britain might recognize these complaints as their own, despite the market exploits and product variety offered by a few champion corporations like Apple. But firms like Apple and Google also prove the point, they were able to challenge established giants like Microsoft and IBM during the era of what Joseph Schumpeter called “creative destruction.” As innovative competitors, they were able to challenge and supersede traditional rivals, but in the process they achieved unprecedented market power.
The trillion dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, and derivatives. They could never have survived, much less thrived, if their deposits had not been guaranteed and if they hadn’t been able to obtain virtually free money from the FED ’s discount window to cover their bad bets. 57
On October 19, 1987, Alan Greenspan , FED chairman, christened the era of “too big to fail” when, in the wake of plummeting Wall Street shares, he cut interest rates sharply, a signal to the banks that the FED was there to save them from their failed speculations. Greenspan’s move alerted the banks that they could make bets, and speculate without prudence. Banks knew the FED would bail them out because they were too large to fail. The aim was, henceforth, perpetual life, endless profiteering without risk or, as some Europeans put it, corporate socialism. It did not take long for Wall Street moguls to pay premiums on mid-sized banks, the better to become too big to fail. Mergers were the antidote to bank death; in fact, they were the antidote to any risk at all. Out of the wreckage of mergers came the following configuration: JPMorgan absorbed Washington Mutual, First Chicago, Chase Manhattan, and Bear Stearns, among others. Bank of America acquired Merrill Lynch, Countryside Financial, Continental Bank, as well as BancAmerica, the parent company; and Citigroup , which started as Citicorp, absorbed Travelers Group.
The consolidations that occurred over two decades not only created a gourmand rent-seeking paradise for those who lived on a diet of deregulation , they also meant—or would mean—the loss of many millions of jobs, trillions more losses for investors, and trillion dollars losses for families whose homes were repossessed. In the collapse of the financial and mortgage markets in 2007 and 2008, what became known as the Great Recession , Americans lost nearly $13 trillion dollars in the value of their homes, pensions , and stocks. Several trillion dollars were recovered, but hardly enough to overcome the loss of jobs and the loss of share value. From just before the Great Recession until early 2010, Americans lost about 8.8 million jobs: many of these if not most have never returned. 58
In a report published in April 2012, the Treasury Department concluded that total lost household wealth in the USA was $19.2 trillion, a figure that seems too colossal to be credible. In fact, it was possibly too low. Better Markets, a financial reform watchdog, estimated household losses at $21.4 trillion, including $7 trillion in real estate, $11 trillion in the stock market decline, and $3.4 trillion in pension funds. 59 The GAO , which estimated household losses at $21 trillion, concluded that the decline in home equity was an extraordinary $9.1 trillion. 60
In addition to losses in household wealth, there was the precipitous decline of GDP. The GAO calculated GDP loss at $2 trillion because of the Great Recession , a massive loss in output. But it also concluded that the cumulative loss of economic output could be much higher, somewhere between $5.7 and $10 trillion dollars by 2018. 61 It is impossible to calculate how much the loss of 8.8 million jobs attributable to the Great Recession contributed to the decline of GDP—or was a consequence of that decline—but this also can be seen as a massive contribution to the growing inequality that followed. 62 Add to all these calculations the $23 trillion that the USA contributed in government programs and bailouts, and you begin to get an idea of the cost of the Great Recession —and the cost of the Wall Street elite who were most culpable. Minimally, even if one were to halve the figures above, which cannot include the suffering of the forty-six million people living in poverty in 2010, the sum comes to more than $23 trillion dollars to maintain the banking and financial elite, to keep them in their mansions, and to preserve their privileges. Other than the super-rich, not many would think they are worth it.
The Great Bank Robbery in the UK: The City of London
The City in the UK has followed many of the same practices as Wall Street, with many of the same predictable results, and with as little shame. Just as Wall Street really believed that everything done by the banks was good for the USA, and for the economy, so did the City of London argue that Camelot was in the near future for Britain, largely because of the efforts of its financiers.
Sir Mervyn King , the erstwhile governor of the Bank of England between 2003 and 2013, though he rose to a prominent position, had a more humble beginning as the son of a railway porter. Showing early promise, he was admitted to Wolverhampton Grammar School and thereafter entered Cambridge where he studied economics and later became professor of economics at the London School of Economics.
Under the guidance of Sir Mervyn, the Bank of England became critical about the culpability of the City of London. Coming from the industrial heartlands, Sir Mervyn expressed deep sympathy for the manufacturing companies and their workers who had lost everything, without the government doing anything meaningful to help them. He was equally critical of the bankers who were responsible for leading the UK into the abyss of financial and economic ruin, while they were bailed out by the taxpayers, many of whom they had ruined because of their greed and recklessness. Looking nostalgically back to the days when banks were more of a local affair, when bank managers and their clients were more likely to know each other, Sir Mervyn rued the loss of the England of yesterday in an interview with Charles Moore of The Daily Telegraph: “There isn’t that sense of longer-term relationships. There’s a different attitude toward customers. Small and medium firms really notice this: they miss the people they know.” 63 In the same interview, Sir Mervyn noted that since the Big Bang of 1986, referring to the deregulation of banking and finance, banks had increasingly speculated with other people’s money and increasingly adopted the view that “if it’s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable.” 64
For at least two decades, beginning in the mid-1980s, British governments had bet on the City, ignoring and even encouraging imprudent speculation, and promoting easy credit fueled by lax monetary policies, just like its American counterpart. Whenever the City was challenged, it pointed out that it employed a lot of people and generated great wealth. Ministers bought the logic, though it was hardly true. Light regulation remained the rule, the better to ensure the innovations, they were assured, were certain to follow. Tory and Labor governments alike argued in Brussels and Luxemburg that the dirigisme of European regulations should not be imported into the UK: why worry about traders raking off money mountains anyway since the proceeds could be recycled into higher public spending. As Larry Elliott and Dan Atkinson put it: “It did not register that the only ways City traders could be making such high returns were by ripping off their employers and shareholders, or taking monumental risks.” 65
The City never created nearly as many jobs as it claimed. The only thing that improved was the influence and power of the City, monumentally so between the Big Bang of 1986 and the financial collapse in 2007. It was only in 2007, when the house of cards collapsed, that the ministers understood that the City had been toxic for the country and had caused systemic risk. Lord Adair Turner, the former head of the Confederation of British Business, who became the head of the Financial Services Authority in 2008, whose responsibility in theory was to police the City, ingenuously admitted that the City was “socially useless,” in part if not in whole. He confessed he could not draw a line between what was socially useful and what was useless, but the inability to make a distinction could hardly inspire confidence in him as a regulator. Simultaneously, Turner advocated for a financial transaction tax that recalled an earlier proposal by American economist James Tobin back in the 1980s, as a check to unbridled speculation in foreign exchange markets. 66 What could be concluded, he said, was that financial innovation was not “axiomatically beneficial in a social as well as private opportunity sense.” 67
Turner’s analysis was at best an understatement. He was more on the mark when he said that much of what was going on in the City, especially after the so-called reform of 1986, was parasitical. The Big Bang that year was partially about the modernization of the City, investing in new computer-driven technology and making it possible to trade electronically. But it was a veritable revolution in the banking and finance industry, opening the doors to widespread predation. It did this by dismantling the separation of investment banking and commercial banking. Where before there had been a wall between advisors and brokers, between deposit banks and investment banks, which mostly speculated in shares, the Big Bang tore the barrier down. This meant that a client could get advice about the market and execute a trade within the same bank. More than a decade before the USA tore down its wall between investment and commercial banking, the British had decided to do the same in the UK.
Inevitably, this proved a boon for investment banks, which now had access to piles of deposits not previously available. The Big Bang may have created a more meritocratic banking system, but it also created a culture that was no longer client based. As Tony Greenham of the New Economics Foundation explained, the investment banks were a transaction-based business: “You change from long-termism to short-termism , from looking after the long-term interests of your client to making the biggest buck out of today’s deal.” 68
Long-term relationship banking has been replaced by short-term transactional banking, often involving opportunistic financial engineering; the maximization of profits, in pursuit of shareholder value, has meant an increasing reliance on intrinsically risky proprietary trading; and, for the traders, the annual lure of the seven-figure bonus has seen them systematically engaged in ludicrously one-way bets – one-way because they are not personally responsible for the losses (“other people’s money”), quite unlike the old City’s salutary partnership structure. 69
Predation was inherent in finance after Big Bang. Bank traders were not held accountable for losses, but were able to reap handsomely when they made winning bets. Under the new regime, traders were being told there were no limits to their speculations, no checks to their greed: advising clients, and then selling them the products they had just promoted, was not deemed morally culpable or a conflict of interest.
Another feature of the Big Bang was that the UK opened up the City for the first time to international banks. This created a precedent for many things: foreign banks were allowed 100% ownership of banks in the UK. The result, as anticipated, was that the City of London became the international home of banking and finance, attracting American banks and foot-free capital from around the globe. Mountains of capital would soon arrive, and as they did so easy credit was everywhere, fueling unprecedented borrowing—and debt: consumer debt, mortgage debt, bank debt. Combined with sub-prime mortgages, home prices surged and debt climbed even higher, especially when sub-prime loans began to reset.
Meanwhile, as in the USA, the UK relied heavily on derivatives to meet escalating demand for credit: derivatives had a way of expanding credit markets beyond the physical limits of the commodities that were the bases of the derivatives securities. And just as in the USA, derivatives were not regulated, and they were part of the shadow banking system. They were therefore invisible, just as the investment banks were gaining access to other people’s money following Big Bang. Bankers should have known that the risk was systemic, and that the derivatives market was inherently fragile. It was after all based on sub-prime loans that were bound to become less affordable when they reset. But then why worry when risk was spread to clients such as pension funds, who were buying the risky securities. And why worry when it was so obvious that the government would step in if the bets went south.
Deregulation had other faces as well. One of them was that Britain had no usury laws. It had abolished them by 1854, about 126 years before the USA decided to shelve its usury laws. This was an open invitation to the consumer credit industry, which after Big Bang was open to the world.
Danny Dorling has likened the new arrangements following the Big Bang as a modern tribute system. 70 With no usury laws to put caps on consumer credit, with the repeal of the firewall separating banks that speculated from banks that took deposits and made prudent loans, with sub-prime loans emerging as a suitable instrument for cashing in on the unsophisticated borrower, with cheap credit fueled by lax monetary policies, the City of London was open for business.
Nigel Lawson , Margaret Thatcher ’s Chancellor of the Exchequer in 1986, when the Big Bang was embraced by government, minced no words about what had caused the global financial crisis of 2007–2012. Speaking on the radio program, Analysis, he explained that the global meltdown was an unintended consequence of the Big Bang, admitting that neither he nor anybody else had understood the catastrophic implications of spreading risk (and offloading it onto others). UK investment banks, previously very cautious with what was their own money, had merged with high street banks—the name for commercial or deposit banks in the UK—putting depositors’ savings at risk. 71
Cost of the Great Recession and the Super-Rich in the UK
Several years on from the financial and mortgage debacles and the Great Recession , the Bank of England sought to quantify the damage caused by the City and its profligate waste of money. It found that the cost of giving license to the City of London to make increasingly larger bets with shrinking reserves of capital and liquidity was unsustainable when the market turned against the bankers, which happened when credit froze and the mortgage crisis exposed the high debt levels taken by bankers. At some levels, the direct transfer of wealth following the financial collapse seemed modest: the taxpayer paid a little less than £20 billion in bailouts, or just over 1% of annual GDP, to the Royal Bank of Scotland (RBS) and Lloyds.
The Bank of England , however, applied a different calculus to its estimations. Its analysis looked not at the actual bailout sums, but at the collateral damage to the entire economy, including the cumulative effect going forward. After all, the banks had caused a global recession, well beyond the borders of the UK. Global losses were estimated somewhere between $60 and $200 trillion: losses for the UK economy were put somewhere between £1.8 and £7.4 trillion. In the case of Britain, the higher estimate was five times larger than Britain’s annual output, a monumental squandering of wealth, the vast majority of it extracted from the British people who paid the supreme penalty in the loss of homes, bankruptcies, and jobs. 72
While British banks were being bailed out by the taxpayer in the aftermath of their failed speculations, the latter were finding that there was nobody to save them. In 1998, there had been less than 20,000 bankruptcies in England and Wales: an additional 4901 had accepted Individual Voluntary Agreements (IVA) with creditors, meaning that they agreed to pay some or all of their debts at an agreed timetable in the future. Eleven years later, in 2009, the number of bankruptcies had grown by a multiple of four, to 74,670: the number of IVAs rose an elevated 1100%, to 47,641, which might be taken as an indication that even if the rich had caused the meltdown with their reckless greed, those who were less fortunate were still trying to pay off some or all of their debts. 73
The rise in bankruptcies was an indication that unemployment rates were climbing. According to the Chartered Institute of Personnel and Development (CIPD), some 1.3 million people were made redundant by the Great Recession . This was the equivalent of 4.4% of people in work prior to 2007. Of those made redundant, about two-thirds were paid 28% less when they returned to work. In many cases, this was because of the difficulty in finding a full-time job, reflected by a rise of 6.2 million in fresh claims for jobseeker’s allowance between April 2008 and November 2009, an astonishing figure revealing the depth of suffering in Britain because of the Great Recession . 74 Predictably, the overall poverty rate in Britain reached a peak of almost 19% in 2008, before gradually falling off to about 15.8% in 2013. Just as astonishing and revealing, a third of the people living in the UK experienced poverty at least once between the years 2010 and 2013. 75
Poverty, joblessness, rising debt, and historically high levels of inequality in the UK could not entirely be attributed to bankers and financiers, yet when they had taken so much for themselves, and then had cost taxpayers so much when the City failed, it seemed obvious except to the high rollers in finance that the more they took, the less there was for everybody else: somebody had to pay for their mistakes and the treasure they extracted from the real economy. So excessive was the damage that Larry Elliott and Dan Atkinson even called it a disease, what economists generally called the Dutch disease. In the UK, the Dutch disease was not caused by the discovery of a natural resource like oil, but rather by the excessive size of the financial sector, which drove up the value of sterling while also skimming off the cream of British universities. What the City accomplished, Elliott and Atkinson argued, was the equivalent of a military coup, in this case a “silent affair … which saw an elite take control of the country and a disproportionate share of its wealth.” 76
As they suggested, the numbers were mind-boggling, though they did not come about by stealth in the middle of the night. Just compare some of the figures. The CEO of Barclays Bank earned a little more than £87,000 in 1980, about 13 times more than what an average worker made in the UK. By 2010, the head at Barclays was paid £4,365,636, the equivalent of 169 times the average wage in the UK. Lloyds Bank was a bit more constrained, perhaps because the bank was almost half-owned by the British taxpayer: the CEO there had to skim by on only £2,572,000, an increase of more than 3141% in three decades. As in the case of Barclays, the CEO at Lloyds in 1980 had made 13 times what the average cashier had made. 77
Entire countries have largely become tribute economies where people do very little of any real value but have to perform particularly intricate rituals to justify their existence while growing no crops, making nothing and helping no one. Being a tribute economy does not greatly benefit most citizens of these countries or even most inhabitants of the tribute cities, of which the greatest in the world are London and New York. … It is only a few at the top of these tribute systems who collect many more tithes than they can spend. 78
At the very top of this pyramid are the financial elite, to whom much of the tribute flows. But when this elite skims so much for itself, it must somehow justify and legitimize its predation. This requires an intellectual corps, which uses its ideological acumen to defend the upper echelons of the banking elite, arguing they are indispensable. But it also requires an army of bankers to do the grunt work: they are the bean counters or those responsible for conducting the actual transactions. They are also the engineers and the sales force who conduct the flows of tribute. They keep tabs on how much has been skimmed. Their collective work is referred to by economists as the transaction costs in coordinating and managing markets. These workers apply the fees for the mutual funds and the commissions for the brokerage houses; they are the accountants who track the money siphoned off by the elites at the top, the legal counsel who help lobby for favorable rules to maintain deregulation . Add all this up and you have what we have become, a transaction economy, or a rentier economy that deeply rewards the financial elite.
In the USA, as early as 1970, 45% of US “productivity” was for transaction costs, more than half of this occurring between firms. Simultaneously, the proportion of sales workers rose from 4% in 1900 to 12% of all employees in 2000. 79 The UK is not far behind, and especially so in the banking and finance sector, the preeminent transaction economy.
One might have supposed that when this sector experienced monumental failure there would have been ambitious reform. This did not happen in the UK any more than in the USA. If there would have been substantive reform, the big banks would have been broken up, solving the “too big to fail” problem. Deposit banks would have been forced to shed their investment bank relationships, eliminating the conflicts of interest that had jeopardized and in many cases destroyed the savings and assets of many households. Banks would have been required to hold much larger capital cushions, as high as 25% of their investments, as advised by economist Barry Eichengreen, instead of the paltry percentage of 3% or less. The result would have been less likelihood of failure and less need for a bailout. Derivatives and complex financial securities could have been banned—or forced to trade on an exchange where they would not be invisible. Finally, and just as importantly, the largest credit rating agencies, Moody’s, Standard and Poor’s, and Fitch, could have been barred from advising security issuers about the structures of what they were offering, while also rating those same securities. It was this last failure in particular that conveyed significant misinformation to institutional investors like pension funds, resulting in catastrophic breakdown. 80
The result of these collective failures to reregulate the banking and finance sector is that banks formerly too large to fail are bigger than ever. In 1960, there were sixteen clearing banks (deposit banks–commercial banks in the USA); by 2016, fifteen of these banks were owned by the four big UK banking groups: RBS, Barclays, HSBC, and Lloyds Banking Group. These banks, plus Nationwide and Santander, accounted for almost 80% of UK customer lending and deposits, with much of the growth occurring in the decade prior to 2017, a decade that included the near global financial apocalypse. Altogether, the assets of UK banks are more than 500% of annual UK GDP; three of the four largest banks have, individually, assets greater than the GDP of the UK, more than $7.9 trillion dollars at the end of 2013. The expansion of the UK banking sector since the 1990s—a period coinciding with deregulation and government coddling of the super-rich banking elite—by far exceeds the growth of the financial sector in all other developed countries. 81 And in Britain, the financial sector grew twice as fast as the British economy in the decade prior to the Great Recession .
In 2014, the largest four banks in Britain controlled almost 40% of the UK’s banking assets. They were involved in many if not most mergers and acquisitions in the UK and many abroad, and they were involved in the bulk of trading in derivatives in the City. Like their American counterparts, the top four British banks offered the largest financial rewards and attracted the brightest talent. In effect, the top four UK banks stood at the helm of the financial sector of the British economy.
As economic power translated into political power, the banking and financial sector was able to exert political muscle. In the elections of 2010, the financiers of the City of London provided more than 50% of funding received by the Tories , a total of £11.4 million. This compared with £2.7 million that the City gave to the Tories in 2005—the year that David Cameron became the party leader—amounting to 25% of total funding raised that year. 82 In 2015, despite the attempts to legislate finance reform, City support for the Tories was hardly diminished: the number of big City backers of the Conservatives had doubled since 2010. A Financial Times analysis showed that eight of the top 20 Tory donors had a City background, accounting for 35% of all party funding. In total, eight City contributors gave £12.2 million. 83
The City has also provided many of the key personnel for economic positions at the helm of British banking and finance: Nigel Lawson , for example, who served Margaret Thatcher as the Chancellor of the Exchequer between 1983 and 1989. Lawson’s father, Ralph Lawson, owned a commodity-trading firm in the City of London and his mother, Joan Elisa Davis, came from a successful family of stockbrokers. 84 In office, Lawson promoted Thatcher’s privatization agenda and helped launch the Big Bang of 1986.
Norman Lamont, who served as Chancellor between 1990 and 1993, had previously served at Rothschilds, an investment bank. Following his stint in John Major ’s Cabinet, he became a director of the hedge fund RAB Capital and Balli Group, a commodities trading house. George Osborne served as Conservative shadow chancellor between 2005 and 2010, and then as Chancellor between 2010 and 2016 after David Cameron became Prime Minister in 2010. His background was not finance, but his father, Sir Peter Osborne, 17th Baronet, was a co-founder of the firm Osborne and Little, fabric and wallpaper designers. And David Cameron , himself, is son of a British stockbroker, Ian Cameron. Theresa May does not have the same pedigree as Cameron, but she worked at the Bank of England for a dozen years prior to entering Parliament. Just as Wall Street and the finance and banking community in the USA has come to dominate the levers of power, and the financial rewards of rent-seeking that power has afforded, the City has done much the same in the UK. The result is an anemic manufacturing sector, unprecedented inequality, and the disappearance of jobs and prosperity for much of what used to be called the working class.
Conclusion
The policies pursued by Ronald Reagan in the US and by Margaret Thatcher in the UK were highly favorable to the financial sector. Each embraced financial and market deregulation and supported a strong currency. The effect was to overvalue the dollar and the British pound sterling respectively, a dream world for bankers but a problem for manufacturing exporters. 85
We cannot foresee the consequences of Brexit on the City and on the UK. The City will want to hedge against the fall of sterling, and it will certainly move some operations to the continent. But, within the UK, the concentration of economic power in the City is unlikely to be reduced, partly because manufacturing has already been diminished. By 2012–2013, banking and financial services accounted for about 12% of GDP at £144 billion. This has been tempered somewhat by the bank levy introduced by the Tories and George Osborne back in 2010, scheduled to reach as high as £2.8 billion per year through 2020—before diminishing to below £1.0 billion—but these figures pale when juxtaposed with damages caused by the banking and financial sector during the crisis. At a minimum, as we have observed, the Great Recession wrought by the banking and financial sector cost Britain minimally some £1.8 trillion, up to £7.4 trillion. These figures are scandalous, yet the City has remained largely unapologetic, arguing that bankers and financiers are roughly three times as “productive” as the rest of Britain. 86
This is a conclusion that demonstrates we have indeed returned to a tribute economy and shamelessly at that. In fact, it is highly unwarranted. Manufacturers make tangible products that consumers can buy and own. Upon purchase, an asset is transferred to the buyer. Finance is different. It is a rent on capital. The borrower has a right to use the capital of a bank or lender, but the borrower must return that capital with a rent. Those who lend the capital will object that they are providing service and they are right. But remember that banks are not lending their money, they are getting their funds from the same taxpayers borrowing from them—via the federal government. Moreover, when governments resort to quantitative easing , they are essentially giving investment banks the right to “create” money by purchasing US treasuries and mortgage bonds from them. That was not only a privilege granted only to big banks in the USA, once again led by the ubiquitous Goldman Sachs , but it gave the same banks the opportunity to charge fees (or rents) to the federal government for the purchase, while being flush with free cash from quantitative easing that could then be used for further speculation.
We should have no illusions. Abolishing usury laws has led to huge rents for the finance and banking sector charged against all borrowers. Deregulating derivatives has led too astronomical rents. Legalizing sub-prime loans, especially with insufficient lending scrutiny, has produced outsized rents and simultaneously led to the loss of trillions of dollars in assets in the USA. Coddling too big to fail banks has fueled bank speculation, leading to enormous subsidies, or rents, to bail them out. Legalizing derivatives like CDOs that are insurance policies on assets not even held by banks is a form of insanity, and an excessive rent that could easily have been avoided by not honoring derivative contracts.
And then there is perhaps the biggest rent of all: the rent that fell on all of us when the governments in the USA and the UK decided that the future was in finance, not manufacturing. This unwarranted decision—and it was a political decision, manufacturing could have been protected—that manufacturing was in the past and not the future was and is a large part of why the USA and the UK de-industrialized as rapidly and as deeply as they did. This was indeed a rent charged against most of us. It not only was a conscious decision to transfer economic and political power to the Street in both countries, it also cost many of us our jobs and homes. We should remember that Germany and Scandinavia did not abandon manufacturing as deeply as in the USA and the UK. We should also remember that economic growth has not been as rapid in the post-industrial era as before. And we should remember that we were much more equal, living in societies that were much fairer, before the era of the rentier in which we live today.
Notes
- 1.
Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (New York: Vintage, 2011); Louis Uchitelle, “Your Money, Their Pockets,” New York Times, April 22, 2010.
- 2.
Danny Dorling , Inequality and the 1 Percent (London: Verso, 2014), 55.
- 3.
Joseph E. Stiglitz, “Inequality Is a Choice,” New York Times, October 13, 2013; see also James Galbraith, Inequality and Instability: A Study of the World Economy Just Before the Great Crisis (New York: Oxford University Press, 2012).
- 4.
Elizabeth Warren and Amelia Warren Tyagi, The Two-Income Trap (Cambridge: Basic Books, 2003), 128–29.
- 5.
David Brooks, “The Bloody Crossroads,” New York Times, September 8, 2009.
- 6.
The Gospel According to Saint Matthew, 19:21.
- 7.
David Cay Johnston, Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) (New York: Penguin/Portfolio, 2007), 18.
- 8.
Ibid., 19.
- 9.
Bankruptcy Abuse Prevention and Consumer Protection Act, Public Law 109–8—April 20, 2005, online at https://www.congress.gov/109/plaws/publ8/PLAW-109publ8.pdf.
- 10.
Robert Reich , Saving Capitalism: For the Many, Not the Few (New York: Alfred A. Knopf, 2015), 59.
- 11.
Joseph E. Stiglitz, Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity (New York: W. W. Norton, 2016), 52–53.
- 12.
“Federal Tax Rates by Year,” at http://federal-tax-rates.insidegov.com.
- 13.
Editors, “Insiders Off Side,” Financial Times, November 28, 2010.
- 14.
Alan Greenspan , “Corporate Governance,” Speech to 2003 Conference on Bank Structure and Competition, Chicago, May 8, 2003, http://www.bis.org/review/r030509a.pdf.
- 15.
George R. Tyler, What Went Wrong: How the 1% Hijacked the American Middle Class … and What Other Countries Got Right (Dallas, TX: Benbella Books, Inc., 2013), 81.
- 16.
Zachary A. Goldfarb, “In Cox Years at the SEC , Policies Undercut Action,” Washington Post, June 1, 2009.
- 17.
Tyler, What Went Wrong, 83.
- 18.
Joseph E. Stiglitz, The Great Divide: Unequal Societies and What We Can Do About Them (New York: W. W. Norton, 2015), 42.
- 19.
Ibid., 43.
- 20.
Lynn A. Stout, “Why Re-regulating Can Prevent Another Disaster,” Harvard Law School Forum on Corporate Governance and Financial Regulation, July 21, 2009, online at https://corpgov.law.harvard.edu/2009/07/21/how-deregulating-derivatives-led-to-disaster/.
- 21.
Joseph E. Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future (New York: W. W. Norton, 2013), 61.
- 22.
Bethany McLean, “The Meltdown Explanation That Melts Away,” Reuters, March 19, 2012, at http://blogs.reuters.com/bethany-mclean/2012/03/19/the-meltdown-explanation-that-melts-away/. McLean makes the point that leverage was very high already by the end of 1998 at all the big banks, up to a ratio of 28:1. The real problem may have been non-enforcement. However, a leverage of 28:1 also drove the housing bubble, driving up prices and interest rates that inevitably led to collapse.
- 23.
Jeff Madrick, The Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Vintage Books, 2011), 349.
- 24.
Ibid.
- 25.
Ibid., 347–49.
- 26.
John Bogle , The Battle for the Soul of Capitalism (New Haven, CT: Yale University Press, 2005), 11–12.
- 27.
Madrick, Age of Greed, 225.
- 28.
Ibid., 226–27.
- 29.
Dani Rodrik, The Globalization Paradox (New York: W. W. Norton, 2011), 237.
- 30.
Catherine Rampell, “Lax Oversight Caused Crisis, Bernanke Says,” New York Times, January 10, 2010.
- 31.
Stiglitz, The Great Divide, 10.
- 32.
Ibid., 16–17.
- 33.
William K. Black, The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry, updated ed. (Austin, TX: University of Texas Press, 2014).
- 34.
Kevin Phillips, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism (New York: Viking, 2008), 41.
- 35.
Tyler, What Went Wrong, 80; and Paul Krugman, “Disaster and Denial,” New York Times, December 14, 2009.
- 36.
Tyler, What Went Wrong, 75.
- 37.
Ibid., 74–75; see especially David S. Hilzenrath, “CFTC Judge Says Colleague Issues Biased Rulings,” Washington Post, October 20, 2010.
- 38.
US General Accounting Office, Financial Derivatives: Actions Needed to Protect the Financial System (Washington, DC: GAO , May 1994), online at http://www.gao.gov/assets/160/154342.pdf; also Nomi Prins, Other People’s Money: The Corporate Mugging of America (New York: The New Press, 2006), 149–50; and Madrick, Age of Greed, 335.
- 39.
Frank Partnoy, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (New York: Times Books, 2003), 326–27; Bethany McLean and Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (New York: Penguin, 2003), 270–71, 327–31.
- 40.
Jeff Madrick, Age of Greed, 336; David Barzoa, “Former Officials Say Enron Hid Gains During Crisis in California,” New York Times, June 23, 2002.
- 41.
Ibid.
- 42.
See the documentary by Alex Gibney, The Smartest Guys in the Room, based on McLean and Elkind, The Smartest Guys in the Room, 270–71, 327–31; many of the details of this story are in Partnoy, Infectious Greed, 321–31.
- 43.
Ibid.
- 44.
Madrick, Age of Greed, 337.
- 45.
Ibid., 338.
- 46.
Ibid.
- 47.
Mark Lewis, “Rubin Red-Faced Over Enron? Not in the Times,” Forbes, February 11, 2002, online at http://www.forbes.com/2002/02/11/0211rubin.html.
- 48.
Madrick, Age of Greed, 340.
- 49.
Kris Axtman, “How Enron Awards Do, or Don’t, Trickle Down,” The Christian Science Monitor, June 20, 2005; online at http://www.csmonitor.com/0620/p02s01-usju.html.
- 50.
Reich, Saving Capitalism, 40–41; Thomas M. Hoenig, “Statement by Thomas M. Hoenig, Vice Chairman, FDIC on the Credibility of the 2013 Living Wills Submitted by First Wave Filers,” Federal Deposit Insurance Corporation, August 4, 2014, online at https://www.fdic.gov/. The five largest banks are JP Morgan Chase , Goldman Sachs , Bank of America Merrill Lynch, Morgan Stanley, and Citigroup .
- 51.
Center for Responsive Politics, “Contributions to Presidential Candidates, Barack Obama (D): Top Contributors, 2008,” online at https://www.opensecrets.org/preso8/indus.php?=2008&cid=N00009638.
- 52.
Reich, Saving Capitalism, 41.
- 53.
Sam Stein, “Summers Received Hundreds of Thousands in Speaking Fees from TARP Recipients,” Huffington Post, May 4, 2009, updated May 25, 2011, online at http://www.huffingtonpost.com/2009/04/03/summers-received-hundreds_n_183058.html.
- 54.
Stiglitz, Rewriting the Rules of the American Economy, 42–43.
- 55.
Ibid., 43–44.
- 56.
Ibid., 31.
- 57.
David Stockman, “Four Deformations of the Apocalypse,” New York Times, December 1, 2010.
- 58.
Christopher J. Goodman and Steven M. Mance, Employment Loss and the 2007–09 Recession: An Overview (Washington, DC: Bureau of Labor Statistics, 2011), at https://www.bls.gov/mlr/2011/04/art1full.pdf.
- 59.
US Department of the Treasury, The Financial Crisis Response in Charts (Washington, DC: US Department of the Treasury, April 2012), https://www.treasury.gov/resource-center/data-chart-center/Documents/20120413_FinancialCrisisResponse.pdf; Sarah Childress, “How Much Did the Financial Crisis Cost?,” Frontline, PBS.org, online at http://www.pbs.org/wgbh/frontline/article/how-much-did-the-financial-crisis-cost/. See also Better Markets, “Americans Have Rebuilt Less than Half of Wealth Lost to the Recession, Study Says,” June 3, 2013, online at http://www.bettermarkets.com/newsroom/americans-have-rebuilt-less-half-wealth-lost-recession-study-says. The Saint Louis FED estimated lost household wealth at $16 trillion for the Great Recession .
- 60.
US Government Accountability Office , Financial Regulatory Reform (Washington: GAO, 2013), 21, http://www.gao.gov/assets/660/651322.pdf.
- 61.
Ibid., 13–17; Congressional Budget Office, Policies for Increasing Economic Growth and Employment (Washington, DC: Congressional Budget Office, November 15, 2011), online at https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/11-15-Outlook_Stimulus_Testimony.pdf.
- 62.
Christopher J. Goodman and Steven M. Mance, Employment Loss and the 2007–09 Recession: An Overview (Washington, DC: Bureau of Labor Statistics, 2011), online at https://www.bls.gov/mlr/2011/04/art1full.pdf.
- 63.
Charles Moore, “We Presented a Great Depression, but People Have a Right to be Angry,” interview with Sir Mervyn King , The Daily Telegraph, 4 March 2011; Larry Elliott and Dan Atkinson, Going South: Why Britain Will Have a Third World Economy By 2014 (London: Palgrave Macmillan, 2012), 78–79.
- 64.
Moore, “We Prevented a Great Depression.”
- 65.
Elliott, Going South, 80.
- 66.
Interview with Adair Turner, conducted August 27, 2009, by John Gieve, Jonathan Ford, Gillian Tett, and Paul Woolley “How to Tame Global Finance,” Prospect Magazine, September 2009, online at http://www.prospectmagazine.co.uk/magazine/how-to-tame-global-finance.
- 67.
Adair Turner, speech at Southampton University, September 2011, cited in Elliott, Going South, 80.
- 68.
Heather Stewart and Simon Goodley, “Big Bang’s Shock Waves Left Us with Today’s Big Bust,” Guardian, October 9, 2011.
- 69.
David Kynaston, “Was the Big Bang Good for the City of London and Britain?,” Telegraph, October 26, 2011.
- 70.
Danny Dorling , Injustice: Why Social Inequality Still Persists, rev. ed. (Bristol: Policy Press, 2015), 298–99.
- 71.
BBC, “Glass-Steagall : A Price Worth Paying?” February 10, 2010, online at http://www.bbc.co.uk/radio/player/b00qbxwj.
- 72.
Andrew Haldane, “The $100 Billion Question,” comments made at the Institute of Regulation and Risk, Hong Kong, March 2010, online at: www.bankofengland.co.uk/publications/Documents/speeches/2010/speech433.pdf.
- 73.
Guardian, “Bankruptcies and Insolvencies Since 1960,” November 6, 2009.
- 74.
Office for National Statistics, “UK Labor Market: December 2016,” Figure 11: UK unemployment rates (aged 16 and over), 1971 to 2016, online at https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/dec2016???#unemployment and “Recession Has ‘Deep Impact’ on Jobs,” BBC News, January 25, 2010, at http://news.bbc.co.uk/2/hi/business/8477687.stm.
- 75.
Office for National Statistics, “Persistent Poverty in the UK and the EU, 2008–2013,” May 20, 2015, at http://webarchives.gov.uk/20160105160709/; see also Mike Brewer, Alissa Goodman, Jonathan Shaw, and Luke Sibieta, Poverty and Inequality in Britain (London: The Institute for Fiscal Studies, 2006), at https://www.ifs.org.uk/comms/comm101.pdf.
- 76.
Elliott, Going South, 81.
- 77.
Ibid., 81–82.
- 78.
Dorling, Why Social Inequality Still Persists, 298.
- 79.
Douglass C. North, “Transaction Costs, Institutions, and Economic Performance” (Occasional Papers no. 30, International Center for Economic Growth, San Francisco, 1992), online at http://pdf.usaid.gov/pdf_docs/PNABM255.pdf; Avner Offer, The Challenge of Affluence: Self-Control and Well-Being in the United States and Britain Since 1950 (Oxford: Oxford University Press, 2006), 94.
- 80.
Barry Eichengreen, “Time to Get Serious About Bank Reform,” Prospect Magazine, January 22, 2015, online at http://www.prospectmagazine.co.uk/magazine/time-to-get-serious-about-bank-reform.
- 81.
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