The market meltdown we’re still paying for

September 16, 2013

The Wall Street banksters caused the financial crisis of 2008 with their wild gambling with untold billions of dollars--betting on people losing their houses and livelihoods.

THE PANIC was plain in the pages of the Wall Street Journal, the mouthpiece-in-chief of Corporate America:

The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson...looked like exhausted surgeons delivering grim news to the family.

That was five years ago, on September 18, 2008, a few days after Lehman Brothers--an investment bank with one of the most famous names on Wall Street and some $639 billion in assets, slightly more than the annual gross domestic product of Canada at the time--declared it was going bankrupt.

The Journal's headline wasn't an exaggeration: "Worst Crisis Since '30s, With No End Yet in Sight."

The price of oil jumped by almost $11 a barrel on June 6, the largest-ever one-day increase in price, setting off panic in other financial markets

What came to be known as the Great Recession had begun, according to official measures, nearly a year before in December 2007. But it started getting that "Great" added in September 2008, when the meltdown on Wall Street triggered by Lehman's collapse pushed the world financial system to the brink.

The liquidation of Lehman Brothers was probably the biggest jolt of the man-made earthquake, but there were others to come: Merrill Lynch forcibly sold off to Bank of America to avoid bankruptcy; Washington Mutual, the largest savings and loan in the country, and Wachovia, the fourth-largest bank, going under; government takeovers of AIG, Fannie Mae, Freddie Mac, General Motors.

In a globalized economy, the Wall Street meltdown spread around the world with blazing speed, taking down more banks and corporations--and then throwing whole governments into a debt crisis when they stepped in to prop up their country's financial systems. The shock to the system was so grave that the mainstream media spoke openly of apocalyptic scenarios--of "the world financial system seizing up, trade collapsing and economic activity slumping," as one report put it.

Naturally, there was a wave of anger at the banksters and their greed. Even Republican presidential nominee John McCain proposed new regulations to rein in the banks' "reckless management and a casino culture on Wall Street." Willem Buiter, the chief economist of Citigroup, was not alone among establishment voices making the case for nationalizing the banks:

Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good, and get bailed out and taken into temporary public ownership when the going gets bad, with the taxpayer taking the risk and the losses? If so, then why not keep these activities in permanent public ownership?

But in the end, the government didn't even rein in the obscene bonuses paid to Wall Street executives. Under first Bush and then Obama, the banks and investment giants got a multitrillion-dollar bailout--and paid no financial or political price, not even having to show a tiny measure of humility or gratitude.

BEHIND ALL the byzantine complexities that the media struggled to explain, the cause of the 2008 financial crisis was very simple at one level--a gambling binge gone bad.

Wall Street encouraged the 2000s real estate boom and the related boom in mortgage loans--including predatory sub-prime mortgages with hidden fees and ballooning interest rates. That was to bring loads of cash into the casino. The banks and financial firms then put together complex investment opportunities for the biggest players to not only buy and sell, but to bet on in an endless variety of ways--with the bankers collecting massive fees with every trade and transaction, not to mention their own betting on the side.

So long as real estate values kept going up, the casino made big money for everyone--or at least the big investors who could afford to get in the game. But when the bubble burst, the house of cards collapsed. As's Lee Sustar argued, "[T]he housing bust has acted as a detonator for more powerful explosives--the enormous debts of all kinds piled up in the shadow banking system created by deregulation." And that caused the wider economy to sink deeper into recession.

Deregulation of the banks had been key to the 2000s boom. During preceding years, especially under Democratic President Bill Clinton, the federal government's rules for financial institutions and operations were rewritten to meet Wall Street's thirst for bigger gambles. For instance, parts of the Glass-Steagall Act of 1933, instituted to put firewalls between commercial banks, insurance companies, securities firms and investment banks in order to stop another 1930s-style market panic, were gutted.

As a result, financial institutions were free to invest in more exotic and riskier financial products--with bigger payoffs all around. The people at the head of firms like Lehman Brothers were raking it in--making the "greed is good" bloodsuckers of Wall Street during the 1980s look "fiscally responsible."

Take Richard Fuld, who ran Lehman from 1994 until 2008. For his "hard work" at the high-finance equivalent of playing the ponies, the "Gorilla of Wall Street," as Fuld was known, made the list of America's 25 highest-paid executives for eight years in a row--until the very year the bank collapsed. He raked in nearly $500 million in compensation during his time as CEO, and he still owns three "homes"--mansions in Greenwich, Conn., and Jupiter Island, Fla., and a ranch in Sun Valley, Idaho.

From the first days of the financial crisis, the "experts" heaped blame for Wall Street's meltdown on ordinary people--workers who "caused" the housing crash because they "bought homes they couldn't afford," for example.

But the real culprits were parasites like Richard Fuld. No one could possibly claim that Fuld or his fellow banksters contributed anything to the good of society as a whole. On the contrary, they sucked billions and billions of dollars into their Wall Street casino for the sole aim of making a tiny group of people rich beyond the wildest dreams of most people.

FIVE YEARS after it was lying in intensive care, Wall Street is looking plenty healthy--courtesy of the U.S. government.

In March, the Dow Jones stock market indicator returned to the high point of the 2000s boom almost five years before, erasing a more than 50 percent loss during the crisis--and it's continued climbing since. The profitability of the banks and corporations had surpassed pre-recession levels long before. Since the crisis times of late 2008, corporate profits have increased at a rate of more than 20 percent every single year, according to the New York Times.

For the elite at the very top of society, things have never been better. According to IRS figures, virtually all the gains from the economic recovery since 2009--95 percent--have gone to the top 1 percent. More than 60 percent of the gains went to the top 0.1 percent--that is, people with annual incomes of more than $1.9 million.

As anyone reading this article almost certainly knows, the working-class majority in the U.S. is living in a very different world.

Some 11.3 million Americans are unemployed, according to the Bureau of Labor Statistics, and tens of millions more have dropped out of the workforce or struggle to make ends meet with part-time jobs. Worker productivity is up, having gained nearly 25 percent from 2000 to 2012, according to an August report from the Economic Policy Institute, while "wages were flat or declined for the entire bottom 60 percent" of the workforce.

The foreclosure crisis that followed the Wall Street crash has largely left the news, but it's not over. Home prices have begun to rebound generally, but many working-class families still aren't out from under extreme mortgage debt. Almost 25 percent of homeowners with a mortgage were "underwater"--meaning they owe more on their loans than their homes are worth--as of the second quarter of 2013, according to the Zillow real estate database.

BY THEMSELVES, these diametrically opposed experiences of the "recovery" are a source of bitter frustration for the 99 Percent. But it gets even more appalling when you consider that the record profits enjoyed by the Wall Street banksters are a direct consequence of a massive transfer of wealth from the rest of us to the rich, carried out by the U.S. government.

Amid Lehman's collapse and the resulting days of chaos on Wall Street, the federal government went into action, putting together a bailout of the financial industry--and revealing in the process a level of bipartisan consensus that shows the bickering that supposedly prevents the two mainstream parties from getting anything done is far more cynical than any politician admits.

Working with the support of congressional Democrats, including presidential candidate Barack Obama, the Bush administration--despite its claimed reverence for the free market--put together the $700 billion Troubled Asset Relief Program (TARP), giving the Treasury Department the authority to take over bad debts and pump cash into major financial institutions. In addition to this, the government eventually committed trillions of dollars to various programs to help the banks.

When it took over, the Obama administration--its Treasury Department staffed by the same Federal Reserve officials who presided over the crisis, alongside plenty of former executives from Goldman Sachs and other banks--adopted the Bush proposal almost without alteration.

When anyone questioned why the government was pouring taxpayer dollars into institutions that had gambled their way into crisis, the answer from the establishment was that a financial industry strengthened by the TARP and reined in by new financial "reforms" would be able to lend money to finance new investments.

The exact opposite happened--banks and other institutions tightened up on every form of credit. For example, in the first three months of 2012, JPMorgan Chase, Wells Fargo, Bank of America and Citigroup cut their lending by a collective $24 billion, nearly wiping out the $34 billion increase in lending from the whole of the previous year.

With all the federal funds sloshing around uselessly in the financial system, the banksters instead started banking guaranteed, risk-free profits--by taking money from the Federal Reserve lent to financial institutions at an effective interest rate of 0 percent, and lending it back to the government through the purchase of Treasury bills at 3 percent interest.

Meanwhile, the Obama administration was too busy with the bailout to press Congress for the promised new regulations to put limits on "too big to fail" banks. When banking "reform" legislation was finally passed in 2010, it was toothless--riddled with loopholes, qualifications and compromises written into the law by industry lobbyists whose salaries were actually underwritten by taxpayer dollars from the bailout.

Wall Street's profits and political power returned with dazzling speed--but one thing that was restored even faster, if it was ever in shortage at all, was the arrogance of the banksters. It came across in the sullen comment of an unnamed financial executive, talking to the Observer newspaper:

We've been ostracized. I went to jury duty about a year ago, and when I said I'm in investment banking, the people in the jury room were making ugh sounds. And I'm like, fuck you. I'm proud of what I do. And I think this firm did a lot to get the recovery going.

Proud? Really?

The banksters caused the catastrophic financial crisis of 2008 with their wild gambling with untold billions of dollars--betting literally on people losing their houses and livelihoods. That's money that could have been used to end hunger around the world or rebuild every crumbling school or provide full-time jobs at a living wage or create a sustainable society that doesn't wreck the environment.

Instead, the money and the resources were wasted on a financial system that exists to make the rich ever more obscenely rich.

Five years after Wall Street's meltdown, we should remember an old lesson we were taught anew--that capitalism is a system controlled by and run in the interests of a tiny minority. The needs of the vast majority of people in that society come second, if at all, behind the drive for greater power and wealth, no matter what the cost. That system must be changed.

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