October 03 , 2008
America’s Money-mad Financial Aristocracy behind the Crash
A market-driven, greed-ridden and virtually unchecked economy dominated by a money-mad financial aristocracy was bound to lead to the current crash that ranks next only to the Great Depression of 1929. The Iraq war under the watch of President Bush undermined in the words of Noble Laureate, Joseph Stiglitz, Professor of Economics at Columbia University, “America’s real source of power - its moral authority”. It was “financed entirely on credit; and, partly because of that, the national debt has increased by two-thirds in just eight years.”
Bush’s presidency is now witnessing a cataclysmic turmoil on the economic landscape. The root cause of the crisis, it is generally felt, is the unbridled operation of American capitalism that has offered to the super rich huge profits through financial speculation and acceptance of risks far beyond logic, yet driven like mad by an unmitigated greed. Now the bill, amounting to $700B in the first instance, is being presented to the common man - the middle class being the most adversely affected. His house is taken over by the bank as he cannot make the mortgage payments, he cannot send his kids to college as the cushion in his income is eaten away by inflation, he can’t find a second job as it has been outsourced and unemployment has reached a record 7.5 per cent. The Wall Street is being bailed out at the cost of the main street, for “our system of free enterprise” as President Bush has put it.
A legacy of his eight-year watch will be the crashing of well-established financial institutions like the Lehman Brothers and Merrill Lynch, virtual nationalization of mortgage behemoths Fannie Mae and Freddie Mac, insurance giant AIG and the merger (cannibalism) of banks, JP Morgan, Bear Sterns, and Washington Mutual.
The credit crunch has already reached a stage where even banks are unable to acquire credit from other banks.
Mr. Bush has himself presented the grim picture in the following words in a TV address to the nation on Sept. 24: “The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of the country’s financial system are at risk of shutting down. The government’s top economic experts warn that without immediate action by Congress, America could slip into a financial panic. More banks could fail. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. More businesses would close their doors, and millions of Americans could lose their jobs.”
The government plea for quick provision of crutches to the faltering financial institutions goes against the grain of a capitalist, market-oriented, economy. Yet, the magnitude of the problem calls for official intervention - a socialist solution, no doubt. The Democratic Presidential hopeful, Barack Obama, has welcomed the Republican administration’s bailout proposals. Puritan capitalists and conservative Republicans are feeling the qualms, and several Democrats too have reservations about the modus operandi of the enormous fund.
Fact of the matter is that virtually all politicians have benefited from the Wall Street largesse. Obama has, for instance, received more campaign money ($22.5m) than McCain ($19.6m). All others involved in the funneling of this enormous amount into the coffers of the financial elite have some stake in the project. Treasury Secretary, Henry Paulson, who has authored the bailout proposals, is reported to have made hundreds of millions of dollars (over $500m) as Chairman of Goldman Sachs. Nancy Pelosy, the Speaker of the House who is also a member of the group being consulted by the President, has reportedly major investments in American International Group (AIG).
According to Senator Bernie Sanders, the economic mess “is the product of Bush Administration’s deregulatory fever and Wall Street’s insatiable greed.” He is the longest serving independent member of the Congress in American history. Much of the turmoil, the Senator maintains, “can be traced to specific legislation that broke down regulatory safety wall in the financial sector and allowed banks and others to engage in new types of risky transactions that are at the heart of this crisis.”
In the post-modern arcane science of high finance, money makes money through speculation without the difficult task of producing or distributing anything concrete. We are all aware of the pain at the petrol pump caused by the speculators pushing up the price of oil by trading in that commodity sitting in their cushy offices thousands of miles away from the oil fields and refineries. Even the terms used in this postmodern field of finance are totally alien and esoteric. Take the term Credit Default Swap (CDS), for instance. A popular website gives the following definition:
“A CDS is a credit derivative contract between two counter-parties, whereby the buyers or fixed rate payer pays periodic payments to the seller or floating rate payer in exchange for the right to a payoff if there is a default or credit event in respect of a third party or reference entity”.
The Wall Street and Commodity Exchange operators have, in pursuit of their uncontrolled greed and easy money through speculative transactions, turned well-intentioned and rational institutions into casinos. Adam Smith must be turning in his grave to witness the grotesque form his plea for unfettered market forces has taken.
In the global economy, unchecked greed of the financial aristocracy has caused the flight of manufacturing to China and the transfer of high-tech, knowledge-based jobs to India causing havoc in the national employment scenario. The aristocracy has, nevertheless, minted money hand over fist. The rich have become richer and the poor have continued to slide down the ladder.
The failures, one after another, of banks and investment companies, appeared like the fall of dominos. Stock markets throughout the world, interlinked as they are in the global economy, started shedding the value of their equities in line with the turmoil at Wall Street. Immediate measures became inevitable to buttress the national economy.
As expected, Congressional leaders and the Bush administration reached an agreement on bailout proposals on Sunday, September 28, according to the NY Times. It authorizes the US Treasury to purchase $700 billion in troubled debt from ailing firms. This is the biggest bailout in American history. A bill incorporating the agreed items will be drafted ove night by Congressional staff and placed before the House on Monday (9/29) morning. In all probability, it would address all loopholes and prescribe concrete measures for supervision so that greed does not take the upper hand again. It would, however, take a long time before the economy resumes its earlier throb and thrust. Would the culprits go unpunished to enjoy their loot?
arifhussaini@hotmail.com
