Economic crash can be viewed from a number of perspectives ranging from causes and effects to the 2008 Crash’s resemblance to the Crash of 1929, which began the Great Depression. This paper will consider the 2008 recession from the standpoint of the financial banking industry, which, according to economic journalists like Matt Taibbi (2010), played a major and significant role in the crumbling of the nation’s economy — just like it did in the Lawless Decade also known as the Roaring Twenties.
Big Banking Meets Big Government
What has now become known as the Era of De-Regulation actually had its beginnings in the 80s decade known just as much for its rampant excess as the early 20s were known for their unbridled lawlessness. Yet, while the latter enjoyed the , the former enjoyed the merging of the financial sector with the political — which began during Reagan’s tenure in the White House. President Reagan started what became a tradition of employing the biggest names from the biggest banks as Treasury Secretary of the United States, a position that consistently allowed self-interest to govern and transform market regulations. Reagan’s appointment of Donald Regan (CEO of Merrill Lynch) heralded the end of the kind of regulation that had kept companies like Goldman Sachs from ruining the economy through . Two Goldman Sachs alumni followed Regan to the seat of Secretary of the Treasury: Robert Rubin and Henry Paulson, the latter of whom helped finagle the public out of its earnings by pushing through the TARP $700 billion bailout of companies like AIG — which, in turn, handed over their shares of the bailout to none other than Goldman Sachs, while Goldman Sachs competitors (like Lehman Brothers were allowed to be crushed without receiving any bailout whatsoever). The U.S. Treasury Secretary position was finally capped off by Timothy Geithner’s accession to the throne (for which he abandoned the one given him at the Federal Reserve). All of this means, essentially, that the kind of big government so hated by members of the Tea Party is actually very cozy with the big business so loved, ironically, by the same Party.
The problem with the Tea Party is that it views de-regulation of big business as a good thing. But de-regulation has been happening for the past three decades and all it has ever yielded have been economic crashes: it happened in 1987; in 1991, the Commodity Futures Trading Commission (CFTC) opened up a loophole for Goldman Sachs subsidiaries and the like to go from speculators to physical hedgers (a big reason prices are so high now); the Internet bubble, the housing bubble, and the credit bubble are all the result of government de-regulation of the finance industry (Taibbi 2010). Bernie Madoff is a prime example of the kind of history-repeats-itself story (see Charles Ponzi of 1920) that tends to make our age have so much in common with the 1920s (Sann).
Goldman Sachs
Charles Ferguson, director of the Academy Award-winning (for Best Documentary 2011) Inside Job, gave perhaps the most public indictment on live television during his acceptance speech, which addressed the issue that remains the heart of what caused the American economy to finally implode in 2008: “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong” (AP/HuffPost).
Ferguson understood what most economic journalists simply refused to examine: the fact that the country had been hijacked by a group of Wall Street bankers who were virtually untouchable — in the same way the old trusts had been, like Standard Oil and Continental Railroad. While members of the press were expressing their outrage at seeing the government divvy up the bailout to programs of little significance, the reality was that these programs were only getting a fraction of the money that was going into the pockets of investment banks like Goldman Sachs.
Back in February 2009, the U.S. Congress passed an $862 billion “economic stimulus” bill to help the struggling American economy recover from the horrible financial crisis of 2007 and 2008. Right now, federal agencies are spending this stimulus money at the rate of approximately 196 million dollars an hour, and they will continue to spend it in staggering amounts up until the September 30, 2010 deadline. (“Stimulus Waste”)
“Stimulus Waste” had plenty of problems with the hundred thousand dollars that were being spent on nonsensical research. What “Stimulus Waste” failed to see was that those hundred thousands were nothing compared to the hundred millions (billions even) that were handed over to the company that helped cause the Crash in the first place — Goldman Sachs:
At the same time it was orphaning more than a billion dollars in the losses, the bank announced a highly suspicious $1.8 billion profit for the first quarter of 2009, with a large chunk of that money coming from money funneled to it by taxpayers via the AIG bailout “They cooked those first-quarter results six ways from Sunday,” says the hedge fund manager. “They hid the losses in the orphan month and called the bailout money profit.” (Taibbi 2010)
That helped keep Goldman from getting too much bad press. But when the public did start to catch wind of what they bank was up to, Goldman’s top executives had little to worry about. Goldman was protected from inside the political machine by people like Henry Paulson and Ben Bernanke. Goldman Sachs was not accountable to anybody, and Ferguson, for one, pointed it out to the millions of viewers watching the Oscars live that night.
Nonetheless, the investment bank turned bank holding company did not escape the fires completely. Matt Taibbi’s expose of Goldman Sachs became the journalistic event of the year — likening Goldman Sachs to a “vampire squid” (“The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”) How Goldman helped crash the economy is a lot like how it helped crash the economy in 1929: (for which Ponzi went to jail, but for which Goldman got off free, with not even a rap upon the knuckles). In fact, the only reason Goldman Sachs did not help the economy crash and burn between ’29 and ’08 was mainly due to the fact that its “legendary senior partner Sidney Weinberg” ran the business with a sense of morality — if it was not good for the economy, it was not good for business. In other words, Weinberg understood the fairness of regulation.
When Weinberg went, so did the ethics. And by 2006 “Goldman was issuing $44.5 billion worth of mortgage-based investment vehicles annually (mainly CDOs), a lot of it to institutional investors like pensions and insurance companies” (Taibbi 2010). The plan behind this plan, however, was where the payoff came: “It bets against the stuff it’s selling!” But as Taibbi makes very clear, Goldman Sachs was committing securities fraud, plain and simple:
In 2009, for instance, the New York City and State comptrollers sued Goldman for selling bundles of crappy Countrywide mortgages to the city and state pension funds, which lost as much as $100 million in the investments. The suit alleges that Goldman misled investors by ‘falsely representing that Countrywide had strict and selective underwritingample liquidityand a conservative approach.’ (Taibbi 2010)
This kind of behavior led directly to the bursting of the housing bubble. But none of this even touches upon the CFTC’s 1991 letters to speculators like the Goldman Sachs subsidiary J. Aron allowing them to set prices of commodities like oil and cocoa in the same way as physical hedgers. Officially, such behavior was against the law and had been for decades. But by the ’90s, Goldman had put enough money and people into the White House to make rewriting the legislation an easy task. As Taibbi says, “Organized greed always defeats disorganized democracy.”
In conclusion, disorganized democracy is exactly where we are at now. Politics has failed on so many levels to break the monopolies that are spiking prices (health care, insurance, oil) and movements like the Tea Party, though justly angry about many things, often fail to see the big picture which is that Wall Street needs policing. The current economic crisis has been the result of years of unregulated trading, hedging, scheming, and defrauding. Yet, as people like Charles Ferguson point out, the very men responsible for the nation’s financial collapse continue to go unpunished.
Reference List
AP/HuffPost. (2011). Charles Ferguson’s Oscar Speech Rips Wall Street: ‘Inside Job’
Director Levels Criticism During Acceptance. HuffPost Business. Retrieved from http://www.huffingtonpost..html
Sann, P. (n.d.). The Lawless Decade: A Pictorial History of the Roaring Twenties.
Retrieved from http://lawlessdecade.net/
Stimulus Waste. (2011). The Economic Collapse. Retrieved from http://theeconomiccollapseblog.com/archives/stimulus-waste
Taibbi, M. (2010). The Great American Bubble Machine. Rolling Stone. Retrieved from http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
