This well-written article featured in The Atlantic pinpoints many of the unscrupulous banking practices, and the politics that go with them, that have brought the U.S. to its proverbial knees.
A serious financial crisis is inevitable when you live too far above your means for too long. This applies whether you’re talking about a single-family household or an entire country. As this article points out, countries in crisis need to learn to live within their means – just like you and I. This may mean increasing exports and cutting imports.
But simple as that may sound, one of the biggest obstacles to a nation’s recovery is nearly always its politics, and the politics here in the U.S. are no exception.
As Jim Bourg states in his article,
“… Typically, countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.”
U.S. Bankers Guilty of Fraud?
In the video above, Bill Moyers interviews William K. Black, a professor of economics and law, who alleges American banks and credit agencies conspired to create a system in which risky loans could receive AAA ratings and zero oversight – exactly the kind of gluttonous overreaching and hair-raising kinds of risk-taking that Bourg talks about in his article.
This video, by the way, is one of the most enlightening videos on what the banks have done that I have ever seen. It’s an extraordinary interview and absolutely worth watching.
In it, Black calls it like it is – Fraud. Some people got very rich over a period of time, and now the entire country is paying the price.
What’s worse is that Timothy Geithner, President Barack Obama’s Secretary of the Treasury, is currently facilitating the cover-up to keep you in the dark about America’s financial insolvency. A recent New York Times and CBS News Poll shows a surprising increase in the belief that the economy is rosy and turning around. Obviously most of them have not seen this Bill Moyer’s interview.
What Went Wrong?
A single bank, IndyMac, lost more money than the entire Savings and Loan Crisis. The difference between now and then, says Black, is a drastic reduction in regulation and oversight.
This financial calamity was brought about not by mishap or accident, but following a concerted effort to undermine and remove all regulations, allowing a creditor free-for-all that hinged on fraudulent risk ratings for bad loans.
This kind of situation is rather typical, according to Bourg. Oligarchs get carried away; they waste money and build massive business empires on a mountain of debt.
And, just like in an emerging market, global investors became afraid that the U.S. financial sector would not be able to pay off its enormous debt, and stopped lending. Once that happens and the bank can’t roll over their debt, they’re standing on the doorstep of bankruptcy – which is exactly what happened to Lehman Brothers last September.
“Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.”
But, says Bourg, there’s a deeper and more disturbing similarity between the U.S. crisis and that of emerging markets in other countries in the past. And that is that elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, by making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. This is exactly Black’s point as well.
And, both Bourg and Black agree that one of the most alarming problems now is that the same people who created this mess are able to use their political influence to prevent the reforms required to pull the economy out of its nosedive.
“The government seems helpless, or unwilling, to act against them,” says Bourg.
What’s the Solution?
According to Bourg, the proven solution to get a nation out of this kind of calamity is to nationalize troubled banks and break them up as necessary.
It would be a complex task, and it would be costly to the American taxpayers – cleaning up the banking system would cost an estimated $1.5 trillion in the long term. But both Black and Bourg agree that only by exposing the full extent of the financial situation, and restoring some banks to publicly verifiable solvency can the financial sector be cured as a whole, and start bringing economic sanity back.
Additionally, we have to break the bankers’ political stronghold and influence, which is currently blocking every reasonable attempt to right the wrongs committed.
Last but not least, to prevent a reemergence of these dangerous banks that are “too large to fail,” the U.S. must also overhaul its antitrust legislation, says Bourg.
“Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face,” he says. “The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy.”