What Hit Us? Behind the Financial Crisis

Marc Pilisuk

wallstreetCongress has approved a $700+ billion taxpayer-financed bailout deal for Wall Street. The amount, according to the electoral reform group, Public Campaign, represented a generous 35,000 percent return on investment for the $2.1 billion in campaign contributions that financial services and real estate industries have directed to congressional and presidential races since 1990. An additional $3 billion was spent in lobbying. The same people whose sub-prime scheming, mortgage-backed security trading, and self-interest accounting produced this financial breakdown have commanded the government’s immediate attention. They invested in government to assure deregulation and lax enforcement of existing rules — the very practices that got us into this crisis. They are reaping this investment to secure their advantages in the actions taken to get us out. The major mechanism of taking over their worst debts with tax dollars, inadequately addresses the fact that average Americans are facing foreclosure, losing jobs and health coverage, and watching their retirement savings dwindle.

When economic depression occurs suffering is widespread. Financiers may buy up depressed assets, but unemployment is typically followed by a rise in emotional breakdowns, suicides and robberies. While the government must take action to stop or slow the slide of the market and prevent further collapse, Congress could also take advantage of this time to restore regulation to a Wall Street that has run wild.

This is election time when professionally managed marketing firms are packaging candidates and platforms to sound as though they are ordinary people representing all of us. The powerful corporate sector needs our belief in elections to legitimize their continued domination of government. But the underside of a system that is largely of, by and for the largest money interests, is being exposed and many voters are not buying a plan that protects the interests that have been draining their own lives.

This would, therefore, be a good time to talk seriously about fair and clean elections. Those who write the biggest campaign checks also write and influence policy. It is essential to rein in the influence of wealthy special interests on our politicians and our public policy. As one important step this means passing the Fair Elections Now Act -— which was introduced with bipartisan support in both houses of congress — to remove candidates from the fund-raising treadmill. Common Cause reminds us of the circumstance of Jack Abramoff, the Washington lobbyist who has spent time in jail for bribing members of congress. But Abramoff also, like many other lobbyists, wined and dined them, provided luxury accommodations to sporting events and contributed to their campaigns. So this activity must be addressed by election reforms.

The second and deeper issue calls upon us to review just what a “financial crisis” actually means. With each financial crisis, we should be asking just who lost what. The people still have the knowledge and skills to provide the goods and services that we need. The tools, the blueprints, the factories and the farms did not disappear nor did the people who know how to run them. No changes have taken place in the real world to cause the meltdown. The crisis is typically caused by changes in the make-believe world of financial capitalism.

The current crisis has occurred in a fanciful constructed world of wealthy players, and their servile mandarins, who create an assortment of financial entities, documents, and packages that go by names like hedge funds, derivatives, collateralized debt obligations, index funds, credit default swaps, structured investment vehicles, subprime mortgages, and of other monetary vehicles barely comprehensible to people who do real work. The commercial pieces of paper have no inherent value and are backed up by few if any standards having intrinsic value. They sell these pieces of paper to the public and to each other. They slice mortgages into arcane and risky instruments, bundle them together, and sell the packages to larger institutions in what amounts to a pyramid scheme. Much of the buying is not done with the buyer’s own money, but with borrowed “leveraged” funds. The purchased papers sometimes represent commodities but the actual commodities are not seen, and may not even exist. They sell “long”, expecting the price to rise or “short”, expecting the price to fall. They sell “naked short”, which means they neither possess nor own what they are selling.

Human creativity that might better have been used to improve the well-being of people and planet is used instead to present an obfuscating name for each gimmick. Behind the linguistic smokescreen the players take greater risks buying and selling increasingly esoteric notes with the shrewdest gamblers dong the best. These papers can be so complex that many of those buying and selling them do not fully understand them. Never-the-less, they resell the pieces of paper to someone else at a higher price, even when one or both parties knows that the paper, while pretending to be payable debt, is virtually worthless. With each transaction, someone earns a commission or a fee. Often knowing that they are trading in questionable debts, the players take out insurance policies allowing them to hedge their bets, to cover themselves against the many risks of the game. Some firms exist solely for the purpose of rating various players, the pieces of paper they issue, and their credit worthiness and giving seals of approval which are relied upon by investors. Yet, some of these rating firms have been incompetent, some simply dishonest.

Government efforts to regulate this game of Monopoly, can also be confused by the complexities of the pieces of paper, compounded by the less-than-transparent practices that envelop the transactions. The practices include speculation, manipulation and fraud. Billionaire financier Warren Buffett has called the pieces of paper “weapons of mass financial destruction.”

William Blum notes that the system is all built on faith, “on the belief that something has worth because it comes with a piece of paper with reassuring words and numbers written on it, because it’s traded, rated, and insured, because someone will sell it and someone will buy it. The same market psychology, the same herd mentality, that went into constructing this house of cards built on pillars of greed can cause the house to collapse. But the Monopoly players keep their bonuses, and bow out with multimillion-dollar golden parachutes while foreclosed tent cities are springing up all over America”(The Anti-Empire Report, October 1, 2008).

Some of those engaged in this speculative buying and selling become multi-millionaires or billionaires. They receive bonuses greater than what most Americans earn in an entire year. The crisis will not prevent them from attending the clandestine conferences at 5-star hotels for the Bilderberg group or the secretive summer camp for the power elite at Bohemian Grove. It will not cause them to lose their multiple mansions or to withdraw their offspring from elite Universities where they join secret societies like Skull and Bones were they are assured of their continuing special status. In fact, the bailout will help to assure that their privileged status continues unabated.

As bad as such investments in the financial sector may be, investor money finds its way there. But what other market options exist for the wealthiest individuals and trans-national corporations. The defense sector is thriving but its market is the US government. It requires wars for growth and produces considerably fewer jobs than can be found in other government supported sectors like education or health. Some corporations are growing by virtue of legal gimmicks that allow patenting of (and profiteering from), plants, animals, and elements of nature. And with the increasing polarization of wealth, there are too many poor people to provide a market for new and often unneeded products in a consumer and advertiser driven society. The new frontiers of the marketplace have vanished and the need for growth forces the big money to the risky games.

The government is in the process of trying to bail out the reckless traders by rescuing them and their system, with our money, from their own excesses. So far, it is occurring without a major restructuring of the rules that permit financial games, without instituting the toughest of regulations, oversight and transparency, and with no guarantee that the pampered power brokers of the Universe will act in any way other than their own narrow self interest while the rest of us struggle to survive.

This is no way to run a society of human beings. We must require our government to be our government.

PsySR member Marc Pilisuk is Professor Emeritus, the University of California, and Professor, Saybrook Graduate School and Research Center. Marc is the author (with Jennifer Achord Rountree) of Who Benefits from Global Violence and War: Uncovering a Destructive System (Greenwood/Praeger, 2008). He can be reached at mpilisuk@saybrook.edu.

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