Wall Street created a house of cards on a mountain of junk debt and nearly drove the world’s economy to ruin. Had they been allowed to fail, the banks would have dragged us into Great Depression II.
Government’s (aka, the American people’s) largesse propped these institutions up like an R.A. holding up a drunken frat guy. And it was understood that this sudden influx of liquidity would come with strings attached: tighter regulation, the end of fantasy derivatives, and other reforms. And yet, in spite of populist outrage, nothing happened. The “too-big-to-fail” banks are now even bigger.
From his article in In These Times, the magazine of workers’ struggles:
A year ago, Wall Street was on life support. Its entire fantasy finance casino had crashed, wiping out years of record profits in a matter of days. The entire phony edifice of structured finance based on junk debt came tumbling down.
The financial sector imploded as banks and investment houses watched their triple-AAA-rated securities turn toxic. Lending ceased as banks realized that all of their trading partners also were loaded with junk. No way would they loan money to anyone.
In a modern society, a credit freeze means instant death to the real economy, since virtually every enterprise, big and small, runs on credit. When the financial sector froze, it pushed the real economy off a cliff.
We were on the verge of the Great Depression II. We all knew what screwed up. The fantasy finance fiasco created and run by the largest banks in the world, totally failed us. And the dogma of deregulated markets screwed up even more.
We relearned the painful lessons of the Great Depression: deregulated finance leads to a speculative casino, then to bubbles, and then to busts, taking us all down. That’s what deregulated finance does.
The credit system needed to be resuscitated in a hurry or the economy would crash even further and faster. For better or for worse, we needed the banks to maintain that credit system, so the banks had to be rescued in the process.
(Many readers have suggested that we should have let the banks and investment houses fail. After all, they gambled and lost, period, the end. In retrospect, this is a very tempting idea. But the consequences to everyday people would have been enormous. It’s possible, even likely, that the unemployment rate would doubled over the present rate.)
It was understood that the public’s largess would come with conditions, and those conditions were obvious:
- Sky high financial salaries would have to come down. Wall Street’s pay expectations were outrageous and unjustified, especially since they were based on phony profits and massive social harm.
- Banks would have to get out of the fantasy finance business. No more opaque derivatives. No more CDOs squared, cubed, sliced and diced. It was time for banking to get back to basics and stick to them for good.
- In short, Wall Street would have to learn to serve America and not the other way around. Really it didn’t seem like that was asking for too much, given that we were providing Wall Street with over $17.4 trillion in TARP funds, liquidity and asset guarantees.
It didn’t happen. None of it. Let us count the ways. We bailed out AIG and allowed it to pay off its credit default insurance to Goldman Sachs and other major banks, at full value, even though AIG was kaput. Goldman walked off with 13 billion and then a few months later, lo and behold, declared record profits. They were daring the government to do something about it. A windfall profits tax would have been more than justified….Nothing happened.