Attempts to rewrite the history of the economic crisis come in many forms; some come from the reactionary right, others from centrists and the liberal left – but all are pursued in the service of neoliberal corporatism. I’ve written previously on the efforts of right-wingers to blame the housing bubble on “big government” and community activists on the left who sought increased funding for affordable housing. Diatribes from Sean Hannity, Rush Limbaugh, Dana Perino, and other right-wingers in recent weeks seek to blame the 2008 collapse, not on Wall Street, but on the Community Reinvestment Act, Fannie Mae and Freddie Mac, and Democrats like Chris Dodd and Barney Frank, all of whom pushed homeownership for the poor and working class.
The right’s attacks are strategically timed to coincide with the discussion of Wall Street reform in Washington. As the thinking goes, if government can be effectively blamed for the economic collapse, then Wall Street can stave off long unwanted pressure for regulation and change. Condemnations of “big government,” however, represent little more than the paranoid fantasies of those with an axe to grind against anyone even remotely linked to “the left.” In this blanket campaign, left radicals like Frances Fox Piven and Robert McChesney are lumped together with corporate socialists like Barack Obama and Nancy Pelosi, and blamed for causing America’s current economic downturn (see Glenn Beck’s recent speech to the NRA, and the recent Nation article, “The Mad Tea Party”).
For those who bother to seriously examine the issues at hand, there’s little truth in the “big government and the left destroyed the economy” fairy tale. In Confessions of a Subprime Lender: An Insider’s Tale of Greed, Fraud, and Ignorance, Richard Bitner chronicles the housing crisis from the perspective of the real estate sector. As a 14-year veteran of the mortgage industry and owner of a subprime mortgage lender, Bitner describes Wall Street’s appetite for profitable subprime mortgages as insatiable in light of increasingly aggressive lending in a “red hot real estate market [that] led to the development of riskier [loan] products.” Bitner primarily blames mortgage brokers, lenders, investment firms, and ratings agencies for pushing unsustainable subprime loans. As he recounts:
“collectively, the rating agencies and investment firms dictated how the subprime market operated. As Wall Street determined the type of loans that could be financed, the agencies rated the securities so investors would purchase the bonds…with little government oversight, Wall Street and the agencies became the defacto regulators of the industry.” Bitner admits that the proliferation of subprime loans was in large part a result of securitization. “The aggressive mortgage offerings that helped higher risk borrowers to finance a home existed because the loan could be sold on the secondary market and packaged into a security.”
Tellingly, Bitner places only secondary blame on quasi government entities like the Federal Reserve for setting low interest rates for home loans and for promoting home ownership as a viable option for most-all Americans. As is well known among economists, most subprime loans that were granted had nothing to do with the Community Reinvestment Act. By elementary logic, then, they could not have been the cause of the housing collapse. As Bitner explains,
“I can point fingers at a lot of different groups, but at the end of the day we ourselves [in the subprime mortgage lending industry] pulled the trigger on every deal. We decided whether a borrower was a good credit risk and we funded the loan using our own money. No one else made that final decision.”
Right-wing conspiracies attempting to rewrite our understanding of the economic crisis are easy enough to debunk, but they aren’t the only attempts to rewrite history. Increasingly, those who helped destroyed the country in the name of “free markets” are describing the economic crisis as unforeseeable, unavoidable, or correctable through private sector initiatives.
Alan Greenspan, a longtime proponent of deregulation on Wall Street, is denying that there was any evidence of a housing bubble when he served at the Federal Reserve. This self serving claim is refuted by economists such as Dean Baker and government regulators who warned about the bubble and speculative finance investments for years prior to the economic collapse.
Larry Summers, now the head of Obama’s National Economic Council, argues that “there’s no real question but that we need to propose much more regulation of derivatives…and I think what was unfortunate was that, as credit default swaps [a type of derivative] mushroomed after 2000, nothing was done.” It’s a twisted, Orwellian world we live in where someone like Summers is able to frame himself as a government watchdog who can be trusted to regulate the derivatives market. Anyone who followed the economy during the 1990s knew that Summers spearheaded the deregulation of derivatives. During his tenure as Treasury Secretary under the Clinton administration, Summers successfully marginalized Commodity Futures Trading Commission head Brooksley Born, who first called for regulating derivatives more than a decade ago. Born was ignored at a time when Greenspan, Summers, and other Clinton neoliberals were singing the praises of “free markets.” Looking back, Born’s warnings of an “unregulated derivatives market” posing “grave dangers to our economy” seem awfully prophetic, while one is left to wonder how incompetents like Summers are able to hold onto their jobs.
Summers’ support for “free markets” was well known at the time he supported the the bipartisan Commodity Futures Modernization Act in 2000 and the 1999 repeal of the Glass Steagall Act through the Gramm-Leach-Bliley Act. Glass Steagall, set up in the wake of the Great Depression, created legal separations between speculative investment banks and traditional banking. The repeal of Glass Steagall set the stage for the rapid centralization of the financial system, with banks investing heavily in derivatives while becoming too big to fail in light of the deindustrialization and financialization of the economy. Summers was one of the foremost opponents of regulating Wall Street, as he pushed heavily for investment in derivatives when he was the President of Harvard. Summers also made millions in profits in unregulated hedge fund investments and from Wall Street speaking engagements, and further strengthened his ties with Wall Street after requesting there be no limits attached to executive pay for those companies receiving “TARP” bailout money from taxpayers.
Summers is merely representative of a generation of government officials – adhering to a neoliberal ideology – which claims that markets function best with minimal government intervention in restricting profitability.
Government intervention is seen as desirable, however, whenever it contributes to corporate profits. Summers paints himself as a newly committed regulator of Wall Street, but it was under his watch that the banks became less competitive, more centralized, and more heavily reliant on toxic financial instruments and unsustainable lending. Democratic and Republican support for the bailout, accompanied by virtually no restrictions on Wall Street in the wake of the TARP bill, ensured that the financial industries’ business practices changed little.
The Obama administration and Congressional Democrats claim to support regulation of Wall Street, yet they’ve systematically refused to break up national banks that have grown into veritable titans. A decade and a half ago, the six largest U.S. banks controlled 17 percent of national GDP. By 2006, the top six banks controlled 55 percent of GDP; today, the top six banks (JP Morgan Chase, Bank of America, Citibank, Wells Fargo, Wachovia, and U.S. Bank) control an astounding 63 percent of GDP. The four largest U.S. banks now underwrite half of all national home mortgages, control two-thirds of all credit cards, and enjoy $7.4 trillion in assets (or half of national GDP).
Attempts by progressives in Congress to legally mandate a breakup of too big to fail banks went down in flames this month. The Senate Budget Committee voted 12 to 10 against Bernie Sanders’ amendment, which would have required the Treasury Department to break up the banking industry within a year. Democratic Senators Sherrod Brown and Ted Kaufman proposed an amendment that would have prohibited any single bank from holding more than ten percent of the nation’s total insured deposits, and limited individual bank’s liabilities to a maximum of two percent of national GDP. These limits would have effectively forced a breakup of the nation’s six largest banks. Sadly, the Brown-Kaufman amendment was defeated in a 61-33 Senate vote.
Opposition to introducing real competition into the banking industry is bipartisan in nature. A third of the Democrats voting on the Senate’s Budget Committee opposed Sanders’ bill, as did six of the seven Republicans voting. Similarly, all but two of the Republicans voting on the Brown-Kaufman amendment opposed its passage, while more than two dozen Democrats voted against it. In short, the alleged commitment of both parties to “free market” competition is nothing but a sham, as these officials unequivocally display their commitment to Wall Street bailouts, followed by a stubborn opposition to real competition in the banking sector.
It is true that the Obama administration unveiled this month its own plan to regulate derivatives. This plan by itself, however, is not adequate to prevent future economic crises. Wall Street’s dealing in derivatives was just one part (albeit a large part) of the 2008 crash. More important was the unsustainable lending practices which created the housing bubble and collapse (the derivatives industry played a secondary role in the collapse by propping up the housing bubble).
The housing bubble was encouraged by deregulation of the banking industry, as seen in the repeal of Glass Steagall. The merger of traditional and investment banks were accompanied by the rapid growth of securitized mortgages, in addition to the reckless financial speculation as personified in the derivatives market. Until too big to fail institutions are broken up, talk of regulating derivatives will do little to solve the fundamental underling problems in our casino-style, financialized economy.
On the one hand, we need to reject the revisionist history that frames the 2008 collapse as unforeseeable (Greenspan’s line) and portrays Wall Street monopoly capitalism as requiring only minor regulation (Summers’ line). We also need to reject right-wing narratives framing “big government” and “the left” as responsible for the current economic mess. It makes no sense to talk about this country’s political economic system (as conservatives do) as if there’s a sovereign “government” on one side of the equation, and victimized “business” on the other. Washington is increasingly controlled by the very same people who own Wall Street, so any attempts to separate the two are impossible, undesirable, and manipulative. Some examples of public-private incest further drive this point home:
Many of the most prominent individuals in the Obama administration who are responsible for regulating Wall Street are former investment and banking executives themselves (see my previous piece: “Larry Summers and the Jobless Recovery”). To talk of the Obama administration as a group of raving “Marxists” (as Glenn Beck and other statist reactionaries do) only makes sense if we recognize them as corporate socialists, committed to the redistribution of taxpayer dollars from the masses to the wealthy, privileged few. This basic point is lost in propaganda disseminated on right-wing radio and Fox News, and beyond the comprehension of those attacking Obama for “taking over” the private sector.
Increasingly, members of Congress, along with most presidential candidates, are part of the corporate class. Most all the candidates running for president in 2008 were millionaires. Nearly half of the members of Congress are in the millionaires club, and many more will join their ranks when they retire from office. It makes little sense, then, to speak of “government imposition” on business when the very officials running government are part of the same clique controlling the private economy.
The bureaucratic-regulatory community is also increasingly subject to “capture” by the private economy. A “revolving door” between public and private institutions has long existed, and it is getting worse. A recent study by CBS News finds that nearly fifty former employees of Goldman Sachs alone have held major positions in the federal government as members of Congress, Congressional committee members and staffers, state and national Treasury Department officials, heads of non-profit government corporations, members of state and national Federal Reserves, as Presidential advisors, and as members of the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the Department of Commerce.
Democratic officials, contemptuously attacked on the right for stifling “laissez faire” capitalism, are themselves inextricably linked to corporate America and deregulation. Democratic Congressmen Chris Dodd and Barney Frank are favorite targets of the right (as they’re demonized for allegedly pushing through government initiatives that “forced” unwilling banks to lend to the poor). However, a close look at these two figures demonstrates their intimate relations with corporate America. Both voted for the Commodity Futures Modernization Act that deregulated derivatives. Dodd’s new legislation calling of financial “reform” contains no provision to restore Glass Steagall.
Electoral support for Dodd and Frank is heavily corporatized. Four of their top eleven campaign contributors include the securities and investment, real estate, insurance, and commercial banking industries. Dodd and Frank also voted for the 2008 TARP bailout, solidifying their status among the strongest supporters of failed Wall Street bankers and speculators. Dodd is the all time largest recipient of campaign contributions from AIG, one of the many firms that shares major responsibility for creating the toxic derivatives mess. Dodd was also responsible for an amendment to the 2009 federal stimulus that exempted AIG (upon the request of Timothy Geithner and Larry Summers) from government regulation of executive bonuses. The gift was the least Dodd could do for a company that gave so generously to his campaigns over the years.
Regulatory agencies like HUD are also attacked by the right for allegedly pushing unsustainable lending policies for the benefit of poor homeowners. A closer look at those who run HUD, however, demonstrates that they are an integral part of the corporate power elite. All of the most recent heads of HUD retain strong ties to the industries responsible for the 2008 economic collapse. Henry Cisneros, the head of HUD under Clinton, sat on the board of the housing builder KB Home, as well as on the board of Countrywide Financial, both of which were major participants in the feeding of the housing bubble. Andrew Cuomo, another secretary of HUD, has relied primarily on the real estate industry to finance his candidacy for governor of New York. One of every five dollars of the total $18 million raised by Cuomo in the last few years came from real estate interests. Bush’s HUD Secretary Alphonso Jackson also enjoyed incestuous relations with the subprime industry. Jackson, along with Cisneros, was one of a number of government officials who benefitted from below-rate home loans from Countrywide Financial, as two of the “friends of Angelo” (Countrywide corporate executive Angelo Mozilo). In short, both HUD officials directly benefitted monetarily from the subprime mortgage fiasco, securing sweetheart deals from an industry they were supposed to be overseeing.
It should come as no surprise that government and corporate officials who caused the economic collapse are seeking to obscure their roles in the crisis. What’s most disturbing is that they appear to be succeeding. The recent efforts of conservative commentators to direct public anger at “the government” and progressive activists, while exonerating corporate America appear to have had a significant effect on public opinion (see my previous piece, “The Trashing of ACORN”). According to recent ABC-Washington Post polling, public support for imposing “stricter federal regulations on the way banks and other financial institutions conduct their business” also fell from 76 percent to 65 percent of the public from February 2009 to April 2010, a sign of the growing strength of reactionary “free market” voices. Furthermore, corporate control of Washington has succeeding in blunting any real reform at a time when most people see the government as a threat to their well-being, rather than a means of regulating destructive business practices. One can hardly blame Americans for feeling this way, in light of our officials’ unflinching commitment to corporate welfare, bailouts, and deregulation.
ANTHONY DiMAGGIO taught U.S. and Global Politics at Illinois State University prior to becoming a casualty of this year’s Illinois budget cuts. He is now an independent researcher and author of Mass Media, Mass Propaganda (2008) and the forthcoming When Media Goes to War (2010). He can be reached at email@example.com