Paul Krugman, who in 2008 was the sole winner of the Nobel Prize for Economic Science, in his book, The Great Unraveling: Losing our Way in the New Century, chronicles the optimistic 1990s which dissipated into gloom in the 2000s because of “incredibly bad leadership, in the private sector and in the corridors of power.” We are not always great fans of Krugman, who was not always as brilliant as he is claimed to be. In the book, he himself writes (quoted from the Wikipedia):
“I was no more perceptive than anyone else; during the bull market years [of the late 1990s] some people did send me letters claiming that major corporations were cooking their books, but – to my great regret – I ignored them. However, when Enron – the most celebrated company of its time, lauded as the very model of a modern business enterprise – blew up, I immediately saw the implications: if such a famous and celebrated company could have been a Ponzi scheme, it was very unlikely that the rest of U.S. business was squeaky clean. In fact, it quickly became clear, the bubble years were both the cause and effect of an epidemic of corporate malfeasance. (p. 26)“
One way to diminish crimes is to obfuscate terminology. The term “corporate malfeasance” is a nice way of ignoring blunt words like “theft” and “fraud”. Moreover, equating the plundering and pilfering of the American economy to an analogically unrelated medical “epidemic” adds an element of excuse to the crime because an epidemic presumes a sudden outside cause, and thus implicitly reduces the personal responsibility and culpability of the actors.
As for the causes of the current financial crisis, Thomas Friedman at the New York Times, a Pulitzer Prize winner from the year 2002, echoed a similar sentiment of a sudden disaster in the year 2008, referring to a meltdown and a breakdown, as if this were a short-term malady:
“[Either] our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.“
“Meltdown” is a term taken from the catastrophic total or partial melting of a nuclear reactor core and really has nothing to do with economics. A “breakdown” is a sudden malfunction. Here again the terminology used by the author suggests – perhaps subliminally as means of reality avoidance – that the current credit crisis was a spontaneous unforeseen event, rather than – as we shall see below – the inevitable product of many erroneous long-term policies and decisions.
The cover text of the March/April 2009 issue of Stanford Magazine casts an illuminating light on the TRUE story, proclaiming in giant text: “The Woman Who Tried to Save Our Money* (*And the People Who Stopped Her)“. In an article titled Prophet and Loss, Rick Schmitt, accompanied by the photography of Erika Larsen, tells the story of Stanford Law School grad Brooksley Born, who was “named to head the Commodity Futures Trading Commisssion in 1996“, and who at that time already warned then Federal Reserve chairman Alan Greenspan of the coming disaster, and tried to implement regulations, only to be told that Greenspan did not believe in laws against fraud in the economic sector and that the market would take care of itself. Nor was Greenspan alone in his sentiments, which were shared by most of Wall Street and the political community, who were – already in the 1990s, and surely in the 80s and 70s – all busy robbing the bank.
Contrary to the – still erroneous – opinions of Krugman, who places the majority of blame for the present crisis in the hands of “radicals” in the Bush Administration – and there is no doubt that the tax and economic policies of the Bush Administration amounted to national theft for the benefit of the wealthy – Born’s story proves that the causes of the current economic situation go further back in time than Bush, and that American institutions and both Democrats and Republicans are responsible for what is happening, so that partisan politics here are totally inappropriate and just downright wrong. Both Democrats and Republicans were raking in the nation’s cash, and still are. All those bonuses are not going to innocent lambs who do not understand the situation. Quite the contrary. Here is a common law definition of fraud:
“All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.” – Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.”
Warren Buffet wrote in 2002 in a letter to Berkshire Hathaway shareholders that “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal, ” but no one listened to him, as Kevin Cool so aptly notes at First Impressions at that same Stanford Magazine in his editorial, “She Saw it Coming: Long before the meltdown, Brooksley Born rang the alarm.” And if people did not listen to Warren Buffet, a world-famous investor in 2002, they most surely did not listen to the virtually unknown Brooksley Born in 1997 . People were deaf to reality. What has changed?
As Rick Schmitt writes in Stanford Magazine online:
“As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives…. One type of derivative—known as a credit-default swap—has been a key contributor to the economy’s recent unraveling….
The swaps were sold as a kind of insurance—the insured paid a “premium” as protection in case the creditor defaulted on the loan, and the insurer agreed to cover the losses in exchange for that premium. The credit-default swap market—estimated at more than $45 trillion—helped fuel the mortgage boom, allowing lenders to spread their risk further and further, thus generating more and more loans. But because the swaps are not regulated, no one ensured that the parties were able to pay what they promised. When housing prices crashed, the loans also went south, and the massive debt obligations in the derivatives contracts wiped out banks unable to cover them.
Back in the 1990s, however, Born’s proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. The economy was sailing along, and the growth of derivatives was considered a sign of American innovation and a symbol of the virtues of deregulation. The instruments were also a growing cash cow for the Wall Street firms that peddled them to eager takers.
Ultimately, Greenspan and the other regulators foiled Born’s efforts, and Congress took the extraordinary step of enacting legislation that prohibited her agency from taking any action. Born left government and returned to her private law practice in Washington….
Congress enacted the Commodity Futures Modernization Act, which effectively gutted the ability of the CFTC to regulate OTC derivatives. With no other agency picking up the slack, the market grew, unchecked.” [link added by LawPundit]
Read the whole story here – if you want to know the real truth. There was no meltdown, it was not an epidemic, it was a long sustained period of unchecked and unregulated greed at top levels of public and private life, leading to the pilfering and plundering of the American and world economy to the tune of TRILLIONS of dollars. Some now have much more and many more now have much less. It would be useful for the journalists of this world to track down who has that money now.
The role of the law is now to figure out how to get that money back, viz. to redistribute the windfall profits that the financial mercenaries have pocketed. Given the way that human beings are, this will not be easy, especially since much of the plundered money is in the pockets of those who in fact are still currently running the financial world.
Are derivatives and related credit and insurance scams the biggest Ponzi scheme ever imagined? Does it make Butch Cassidy and the Sundance Kid look like petty amateurs?
People of the law – you permitted it, either willingly – most likely, or, less likely, due to a well-meaning misunderstanding of human vices and virtues and of how the real market works. Mankind shows time and again that it is a selfish beast, when not properly constrained. That very conclusion is the honest assessment of humanity which is at the root of capitalism, contrary to the erroneous and amply disproven theories of Marxism-Leninism that men and women are good at heart and willing to work for their fellows out of simple good will. Most of them NEVER do. And that is why we have law and lawyers – both of which should function as the regulatory instances for keeping things fair and honest at the societal level. In the modern era, caught in the search by people of the legal profession and elsewhere to become “materially wealthy” and to “be important” or “powerful” in the eyes of their peers, the true role of the law as the protector of the common weal has been largely lost.
In this connection we refer to Linda McQuaig, who wrote Lost in the Shopping Mall in the Queen’s Quarterly in 2002, which we excerpt below from ArticleArchives.com:
“[P]undits appear[ed] shaken by the astounding greed and dishonesty at the heart of [Enron’s] corporate culture. Still, some shrug it off as simple human nature, saying that we are inherently a competitive, acquisitive species, naturally inclined to push our own self-interest as far as we possibly can. But is this the whole picture? Is our society really nothing more than a loose collection of shoppers, graspers, and self-absorbed swindlers? Perhaps we are in danger of becoming such a culture, but it is important to remember that culture itself is a learned set of rules….
[T]he concept of the public good is one that has fallen out of favour in recent years. Over the last two decades, it has become increasingly common to dismiss the notion that we all share an interest in the broader community, that society is more than simply a collection of individuals all pursuing their own individual material self-interest. With the decline in support for the notion of the public good, we see a growing acceptance of private power, and a willingness to allow the corporate sector to dominate the economic and political spheres.
This emphasis on corporate rights is something of a departure from the early postwar years, when it was widely accepted that corporations should be subject to the control of society. It was therefore accepted that governments had an important role to play in regulating corporations and the economy, in redistributing resources through the tax system, and in providing social supports. Overall, it was expected that government would defend the public good.
The “new” capitalism of the last two decades is about diminishing the role of government and extending the rights and influence of corporations, through privatization, deregulation, and cutbacks in the size and scope of government. In many ways, of course, this isn’t really a “new” capitalism at all, but rather a throwback to an earlier kind of laissez-faire capitalism.
There is a tendency these days to see the aggressive new capitalism as inevitable, as rooted in human nature. It is widely assumed that humans are intensely acquisitive, materialistic, and individualistic by nature, and that therefore it is naive to think of any notion of the public good.
The late economic historian and anthropologist Karl Polanyi mounted a powerful challenge to this view — not on moral grounds, but on the grounds of observing the way people in other societies behaved. Polanyi argued that the intense focus on material acquisitiveness, which seems so natural in our society, is a historical aberration, something that really does not exist outside of the type of capitalist society that has developed in the West in the last few hundred years. All societies throughout history have devised ways to meet their material needs. But in other societies, meeting material needs was only one of the many functions that an individual performed in that society, and was considered a less important focus than other aspects of life — like religion, family, kingdom, clan, tradition, and law….
Polanyi argued that the one characteristic found in humans in all societies is not a focus on material acquisition, but rather a need to interact with other humans. According to him, humans are first and foremost “social animals” — an observation made centuries earlier by Aristotle. As social animals, we seek to relate to other humans and naturally form ourselves into communities. And, as social animals, we have a strong self-interest not just in acquiring material possessions, but in creating and maintaining strong, viable communities and in protecting the natural environments that sustain these communities. The point is not to suggest that humans are nicer than our economic theories suggest, but rather that human needs are different than we have come to believe. In other words, being part of a strong, viable community is not just a nice, idealistic notion but is part of our deeply rooted set of human needs, part of our human hardwiring.
If this is true, it raises the question of whether the new capitalism is undermining our own self-interest by limiting our ability to take collective action to protect our communities.” [links added by LawPundit]
Read McQuaig’s article in full.
Essentially, if one follows McQuaig’s thread of reasoning, then the solution to the present financial credit crisis is “collective action” “to protect our communities“. It will be interesting to see how that necessity guides government and private policies in the months ahead.