Fred Branfman on ‘The Big Short’
“For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different. There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well. Middle-income households made less in 2008 than they did in 1999. And the net worth of American households … has also declined compared with sharp gains in every previous decade since data were initially collected in the 1950s.”
— “Aughts Were a Lost Decade for U.S. Economy, Workers,” Washington Post, Jan. 2, 2010
“Rep. Henry Waxman: You have been a staunch advocate for letting markets regulate themselves. Were you wrong?
“Alan Greenspan: Yes, I found a flaw … in the model that I perceived that was the critical functioning structure of how the world works.
“Waxman: In other words you found that your view of the world, your ideology was not right.
— Testimony, House Oversight and Government Committee, Oct. 23, 2008
My cardiologist recently said I must either pay $50 to ask him a question about my potentially serious heart condition outside our annual exam or schedule an appointment so he could bill Medicare $50 for it. “Schedule an appointment just to ask you a 30-second question?” I asked incredulously (I live abroad part of the year). “Look,” he exploded, “you love Medicare because you see your doctor for free! But when they talk about `cutting Medicare,’ they’re cutting us, the doctors! And if they cut payments to us, we are going to reduce services to you! I’ve got bills, kids to put through college! I’m not in this for my health, you know!”
While I appreciated his honesty (I’d hate to live under the illusion that he was in it for my health), what most struck me was the indignation in his voice. Medicare costs may be skyrocketing and must be controlled to preserve the system. But try to save it by partly reducing doctors’ incomes? “How dare they!” was his clear attitude.
This attitude of entitlement comes across loud and clear in Michael Lewis’ “The Big Short,” whose greatest value is to bring us the insights of those who made hundreds of millions of dollars by betting against, i.e. going “short” on, the unsound subprime mortgage packages peddled by Wall Street titans and blessed by policymakers like then-Fed chief Alan Greenspan.
Lewis’ protagonists, among them Steve Eisman of FrontPoint Partners and Mike Burry of Scion Capital, a one-eyed doctor with Asperger’s syndrome, speak in wonder and disgust of the arrogance of those top Wall Streeters — from Goldman Sachs, Morgan Stanley and Bear Stearns — who knowingly repackaged home loans made to thousands of people who could not afford to repay them, kept rating agencies like Moody’s in the dark about their shoddy content, and then resold them to institutional investors around the world after claiming that the rating agencies had certified them.
Eisman and Burry clearly understood the financial system better than the Alan Greenspans and Henry Paulsons who were supposed to regulate it. When they talk, the rest of us need to listen.
Lewis reports that Burry had been “the first investor to diagnose the disorder in the American financial system. Complicated financial stuff was being dreamed up for the sole purpose of lending money to people who could never repay it. … To Michael Burry, the subprime mortgage market looked increasingly like a fraud.”
And this is what Eisman imagined saying to those who caused what Ben Bernanke has called “a cataclysm that could have rivaled or surpassed the Great Depression”:
“The upper classes in this country raped this country. You fucked people. You built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience. Nobody ever said ‘This is wrong’.”
To see long excerpts from “The Big Short,” click here.
It is difficult to disagree with this assessment, given that top Wall Street bankers enriched themselves while throwing millions out of work and homes, bankrupting municipalities and entire nations, and fleecing taxpayers for hundreds of billions in bailout funds. That they have then taken absurdly high bonuses, part of which they use for lobbyists and political contributions so as to gut any attempts to rein in their behavior, is properly seen as a declaration of class war against a majority of Americans.
But it is wrong to see the financial crash of 2008 as an isolated phenomenon of Wall Street rapacity. On the contrary. The mentality behind the financial crisis — that making money is the top priority, and that those who can may do whatever they wish to make more of it — permeates every corner of the top reaches of American society. And even if it can be argued that this attitude was tolerable while the U.S. economy was growing, it will clearly tear this society apart if we have now entered an era of prolonged economic stagnation or even decline. For if so, more for those at the top means less for everyone else — including cardiac care which can determine whether one lives or dies.
The basic fact that none of our leaders dare say aloud — from CEOs to economists to politicians — is that the U.S. private sector and capitalism itself have failed, as well as the government charged with controlling its worst excesses. Greenspan’s admission that free markets have failed was a stunning admission from its greatest proponent. But none — including conservatives calling for a return to the free market, President Barack Obama calling the CEO of Goldman Sachs — whose firm is being sued by the SEC — a “savvy businessman” whose $9 million bonus he does not “begrudge,” and a Congress dependent on Wall Street for campaign contributions — have been willing to even acknowledge the implications of Greenspan’s admission, let alone act on them.
How can anyone in his or her right mind trust today’s pronouncements by economists, CEOs or government leaders when they not only failed to foresee but often actively abetted the worst financial crash since the Depression? The frightening truth is that the U.S. economy today resembles a ghost ship sailing in the fog, the captain’s deck unoccupied, sustained only by its forward momentum and ability to keep bailing water by borrowing trillions and printing money in a desperate attempt to keep afloat.But the real truths revealed by the 2008 financial crisis go far deeper than this Shakespearean epic of amoral and criminal Wall Street rapacity. The simple but frightening truth is that not only Wall Streeters but CEOs and government regulators are incompetent as well as greedy. They have become obstacles to economic growth as America enters a “late capitalist” phase in which the powerful prey upon the weak — including manipulating angry mobs of the uninformed — rather than producing new and healthy growth, e.g. a Clean Energy Economic Revolution, which is America’s major hope for a strong economic future.
Greed had been around a long time, certainly in America, from the era of the “robber barons” to tobacco companies and Ivan Boesky in postwar America. But what is new — and most alarming — about our present state of affairs is the confluence of greed and incompetence; lack of conscience and the hollowing out of U.S. industry; enormous political clout enjoyed by economic moguls who contribute little to the overall wealth of society; and a shockingly politicized and nonjudicial Supreme Court which has just strengthened the corporate stranglehold on our economy by allowing corporations to directly campaign for candidates.
The greed of 19th century robber barons was no less than that exhibited by today’s Wall Street leaders. But the former also built the railroads and created the oil and automobile industries that made America the world’s leading economic power (aided by America’s rich resource base, isolation from devastating European wars and massive government assistance). And, although it took strong government regulation of and aid to the private sector, enormous sacrifices by union workers, and massive public investment in infrastructure, a rising tide of economic wealth did indeed lift enough boats to create an enormous U.S. postwar middle class. Many of today’s CEOs, Wall Street barons and government leaders, by contrast, do not build. They destroy.
What is lacking in the books about the financial crisis of the last decade, including Lewis’, is a parallel examination of the gutting of the “real” economy — manufacturing, infrastructure and high tech — as America’s political, economic, financial and business leaders ignored or actively fostered America’s internal economic decay.
During the 1980s, as research director for California Gov. Jerry Brown and Sen. Gary Hart’s think tank, and director of Rebuild America, I worked on economic policy with many of America’s top CEOs, manufacturing experts and economists. Rebuild’s advisory board included Intel co-founder Robert Noyce, current economic czar Larry Summers, Nobel laureates Robert Solow and Paul Krugman, Laura Tyson (later to chair the Council of Economic Advisers), Robert Reich (Bill Clinton’s future labor secretary), Boston Fed Chair George Hatsopoulos, and Ed Miller, president of an R&D consortium of America’s top manufacturers.
What most struck me were the contrasting opinions of the macroeconomists and many of America’s most successful high-tech CEOs, such as Intel’s Noyce and Andy Grove, National Semiconductor’s Charlie Sporck, Apple’s Steve Jobs and Hewlett-Packard’s David Packard, the latter two serving on the California Commission on Industrial Innovation, whose final report I authored.
Many high-tech leaders who actually made and built the industries that drove postwar U.S. economic growth were alarmed about the future of the U.S. economy as a whole. They called for national competitiveness strategies to maintain strong domestic industries rather than export U.S. plants and jobs abroad, emphasizing the need for low-cost capital and cooperative private-public efforts to buttress high-tech sectors targeted by the Japanese. These were not failing auto manufacturers but some of America’s most successful business leaders, and their advice needed to be taken seriously. It was not.
Numerous studies during this period debunked the canard that labor costs forced U.S. companies to locate abroad. Labor was only a modest portion of overall costs and often was offset by the advantages of having skilled workers and proximity to one’s market — as Japanese automakers demonstrated by building plants in the U.S. while U.S. automakers shifted production overseas. High-wage nations like Germany and those in Scandinavia demonstrated conclusively that it was possible to remain competitive while paying domestic workers relatively high salaries.
However, macroeconomists who knew little about the real economy, like Larry Summers, sneeringly dismissed such “micro” concerns, insisting that all that was needed was to reduce the budget deficit and get monetary policy right. Politicians, including those in Republican and Democratic White Houses, ignored or even actively opposed competitiveness strategies. Older industries, most conspicuously the auto industry, were consistently outmaneuvered by smarter and more efficient foreign competitors.
These 1980s seeds of economic decline began to grow into serious problems in the 1990s although an Internet bubble covered over America’s ongoing internal economic decay. Treasury Secretary Robert Rubin was absurdly deified, e.g. through the creation of a new school of “Rubinomics.” He made Summers his successor after his deputy led the fight to gut the Glass-Steagall Act, which divided commercial and investment banking, and to actively block regulation of shoddy Wall Street lending. Rubin then used Glass-Steagall’s collapse to enrich himself by forming the giant conglomerate Citigroup, the world’s largest until it collapsed and needed a $306 billion taxpayer bailout. Meanwhile, the Clinton administration further gutted America’s domestic industrial base by supporting NAFTA and the World Trade Organization, and standing by while China started to become an even greater industrial threat than Japan.
As director of Rebuild America I wrote in November 1988 — in collaboration with Summers, Solow, Krugman, Reich, Tyson, Hatsopoulos, Lester Thurow, Pat Choate and Lawrence Chimerine — a white paper entitled “An `Investment Economics’ for the Year 2000.” We called for setting specific targets for investment in education, training, R&D, infrastructure and plant and equipment, e.g. that gross nonresidential fixed capital formation be 23 percent of GNP by the year 2000. Such thinking, however, was entirely ignored during the Clinton years.
The death of even more of our domestic industrials was ensured in the 2000s under George W. Bush as U.S. officials promoted exporting U.S. jobs abroad; Fed Chair Alan Greenspan — even more ridiculously deified than Rubin — supported the shoddy lending which led to the financial crisis; and the financial sector amassed 40 percent of overall corporate profits (up from a tiny percent when postwar American industry was actually growing and creating jobs).The November 2008 financial crisis is thus properly understood not as an aberration but the logical culmination of 30 years of incompetence throughout every sector of the U.S. economy. Those involved in the financial crash, as Eisman explains, included:
— THE FINANCIAL INDUSTRY: “The subprime mortgage loan was a cheat. You’re basically drawing them in by telling them, `You’re going to pay off all your other loans — your credit card debt, your auto loans — by taking this one loan. And look at the low rate!’ But that low rate isn’t the real rate. It’s a teaser rate.” Eisman also learned from the CEO of Golden West Financial Corp. that free checking “was just a tax on poor people — in the form of fines for overdrawing their checking accounts. … That’s when I decided the system was really, `fuck the poor.’ ”
— THE FED: “Greenspan he viewed as almost beneath his contempt, which was saying something. `I think Alan Greenspan will go down as the worst chairman of the Federal Reserve in history. I’m convinced he knew what was happening in sub-prime and he ignored it, because the consumer getting screwed was not his problem. I sort of feel sorry for him because he’s a guy who is really smart and was basically wrong about everything.’ ”
— THE RATING FIRMS: “ `They’re underpaid. The smartest ones leave for Wall Street firms so they can help manipulate the companies they used to work for. There should be no greater thing you can do as an analyst than to be the Moody’s analyst. … Instead, it’s the bottom! …’ To judge from their behavior, all the rating agencies worried about was maximizing the number of deals they rated for Wall Street investment banks, and the fees they collected from them.”
— THE MEDIA: His assistant Danny Moses explained that “we turned off CNBC. It was very frustrating that they weren’t in touch with reality anymore. If something negative happened, they’d spin it positive. If something positive happened, they’d blow it out of proportion.”
Lewis sums up this saga of incompetence thusly:
“The people in a position to resolve the financial crisis were, of course, the very same people who had failed to foresee it. All shared a distinction: they had proven far less capable of grasping basic truths in the heart of the U.S. financial system than a one-eyed money manager with Asperger’s syndrome. … The world’s most powerful and most highly paid financiers had been entirely discredited; without government intervention every single one of them would have lost his job; and yet these same financiers were using the government to enrich themselves.”
And as for the financiers, so too for much of the rest of the top tiers of the American economy. The key question now is how long it will take the general public to realize that most of the entire private sector has failed, and that entirely new arrangements are needed — featuring strict regulation, bank nationalization where appropriate, greater worker control, public members on corporate boards and a national economic strategy prioritizing the interests of workers and citizens.
The immediate prospects are not promising. The Supreme Court decision will help elect Republicans, whose policies of less regulation, less taxes on the wealthy, and less help for those in need will profoundly deepen the economic and social crisis. Voters and tea partyers mistakenly supporting demagogic Republicans who most threaten their incomes and jobs will grow even angrier, as will workers throughout the economy as their suffering becomes increasingly intolerable, leading to ugly class division, and possible violence and police measures to counter them.
The key question, however, is what will happen over the longer run. As even the most obtuse are finally forced to realize we can no longer rely on a failed private sector, there will be mass support for new approaches. America’s last private sector failure ushered in an era of government intervention, featuring job-creation and safety net programs financed by taxing the rich, and strict private sector regulation. Today’s economic stagnation could create mass support for an even more radical “New Deal,” especially since it will be exacerbated by the aging of the giant baby boom generation. As 77 million boomers — and their low-earning children who be unable to support them — find U.S. economic decline affecting not only their quality of life but how long they get to live, there will be unprecedented demands for an expanding safety net.
As discussed in Theodore Roszak’s “The Making of an Elder Culture,” [To see Fred Branfman’s Truthdig review of the Roszak book, click here] a baby-boom generation fighting not only for its own survival but a wider safety net for all those threatened by economic decline could create the only rational and humane alternative to today’s mess: European-style welfare-state policies ensuring that the pain of America’s inevitable decline is shared equally, so as to maintain social cohesion and avoid disintegration into warring camps.
Whatever happens, however, one thing is sure. Cardiologists — and overpaid Wall Street bankers and CEOs, and the politicians who do their bidding — can maintain their present way of life only at the expense of everyone else. How soon the public wakes up not only to what Eisman calls the “rape” of the American economy by Wall Street, but the gang rape perpetrated by so many more of our economic and political leaders, will determine not only Americans’ economic well-being but the future of democracy.
Fred Branfman, the author of a number of books and the editor of “Voices From the Plain of Jars: Life Under an Air War,” exposed the U.S. secret air war in Laos while living there from 1967 to 1971 and went on to develop solar, educational and Information Age initiatives for California Gov. Jerry Brown and national policymakers.
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