Crisis in the American Financial System

Henry Srebrnik, [Charlottetown, PEI] Guardian

Since the Reagan years of the 1980s, the American financial system has been allowed to operate virtually unchecked by elected officials.

“Government” and “bureaucrats” became the objects of derision, especially on the part of Republicans, while the “Masters of the Universe,” Wall Street investment bankers and financiers, went about their business: the business, not of producing things, but of making money, and tons of it.

During the same period, the economic condition of middle and working class Americans deteriorated, under both Democratic and Republican administrations. Unions were weakened, more and more full-time manufacturing jobs were “outsourced” to low-wage countries overseas, and replaced by minimum-wage service jobs.

The gap between the very rich and everyone else grew. Three decades ago, notes New York Times columnist Nicholas Kristof, heads of major American corporations typically earned between 30 and 40 times the income of ordinary workers. Last year such CEOs averaged 344 times the average pay of workers.

The now disgraced head of Lehman Brothers, the venerable 158-year-old Wall Street firm that went bankrupt last week, took home nearly half a billion dollars in total compensation between 1993 and 2007. That’s not a typo – half a billion!

Both political parties allowed, indeed even encouraged this. You think Bill Clinton provided more oversight than George W. Bush has? Think again. His daughter Chelsea works, not for a company that produces something with use value – say, cars, or paper clips, or shoes – but for a hedge fund.

(Here’s Wikipedia’s very simple definition of a hedge fund: “a private investment fund, having a largely unregulated pool of capital, whose managers can buy or sell any assets, make speculative trades on falling as well as rising assets, and participate substantially in profits from money invested.”) Because a hedge fund markets to accredited investors only, it is free from direct regulation. These are, so to speak, exclusive clubs.

So the fact that Chelsea Clinton was hired as an “analyst” at Avenue Capital Group, a US$12 billion hedge fund, rather than as an executive at, say, Acme Widget or the Jones Shoe Manufacturing Corp., should tell you something. In fact, Wall Street traders were among the biggest donors to Bill Clinton’s campaigns, and to his wife Hillary’s, as well.

Don’t place all the blame on Bush.

Hedge funds, derivatives, leveraged buying and selling, sub-prime mortgages – all forms of financial sleight of hand, really – grew by leaps and bounds, until they all became part of a giant house of cards, in effect pyramid schemes destined, as sure as down follows up, to eventually collapse.

Now has come the reckoning. The U.S. Treasury and the Federal Reserve are now pumping hundreds of billions of dollars into the financial system to rescue companies such as insurance giant AIG from insolvency.

Many more dominoes may fall. The administration is preparing a massive intervention to revive the financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers. It involves using hundreds of billions of dollars in government funding to buy up bad loans.

And who will, in the end pay for all this? Not the CEOs who walked away with billions of dollars. It’ll be the taxpayers, including people making US$16,000 a year at gas stations or supermarkets, who typically don’t even have any health insurance. They will in effect be bailing out the multi-millionaires.

This has been “Hurricane Wall Street,” and it will have as detrimental an effect on John McCain’s presidential campaign as Hurricane Katrina did in 2005 on George Bush’s legacy, which has never recovered from the disaster in New Orleans.

These economic woes should certainly help Barack Obama to victory in November. Rightly or otherwise, the Wall Street mess is blamed squarely on the Republicans.

And since this economic crisis isn’t going away anytime soon, no one wants the 72 year old McCain in office lest he moves on to the hereafter and Americans wake up to find themselves governed by the former mayor of Wasilla, Alaska, Sarah Palin – who got her first passport in 2006 and had never been overseas until last year.