Latimer on Law & Politics

What Over The Counter Derivatives Would Jesus Buy?

                                         What Over The Counter Derivatives Would Jesus Buy?

"The men who are idle or credulous the men who seek gains not by genuine work with head or hand but by gambling in any form, are always a source of menace not only to themselves but to others. If the business world loses its head, it loses what legislation cannot supply. Fundamentally the welfare of each citizen, and therefore the welfare of the aggregate of citizens which makes the nation, must rest upon individual thrift and energy, resolution and intelligence. Nothing can take the place of this individual capacity; but wise legislation and honest and intelligent administration can give it the fullest scope, the largest opportunity to work to good effect. . . .  It is no limitation upon property rights or freedom of contract to require that when men receive from government the privilege of doing business under corporate form, which frees them from individual responsibility, and enables them to call into their enterprises the capital of the public, they shall do so upon absolutely truthful representations as to the value of the property in which the capital is to be invested."  - President Theodore Roosevelt, State of the Union Address, 1901.

"Banking is not the creator of our prosperity but the creation of it.  It is not the cause of our wealth, but it is the consequence of our wealth; and if the industrial energy and development which has been going on for so many years in this country were to be hindered or relaxed, then finance and all that finance means, will follow trade to the countries which are more successful than ourselves." - Joseph Chamberlain, Colonial Secretary U.K., 1904.

"So pulling back  on the financial (regulations), I think if you do too much too soon, it doesn't have a chance to catch up and see if we can work out of this ourselves through free enterprise, through private enterprise, intervention and creativity. . . . So I'm all in favor of just holding back for a little bit and letting private enterprise try to get us out of this mess." - Senatorial candidate Scott Brown, R. Mass., to Bob Oakes, wbur.org, interview 9/14/09

"The House has already passed financial reform. . . and the lobbyists are already trying to kill it. Well, we cannot let them win this fight."  - President Barak Obama, 2010

            Collateralized Debt Obligations, anyone?  How about a couple of nice, hot Credit Default Swaps?  Sweet deals they are, too, with no Big Government looking over our shoulders to say "no."  Plus, if they should happen to crash, then the federal government will have to step in to bail us out because we're too big to fail.  Neat, huh? 

           So, you think Jesus would have nibbled on that line?  A lot of Christian fundamentalists do, apparently, judging from the way they vote straight Republican.   The Christian right in America is a real piece of work when you think about it.  They claim to believe in the literal truth of the Holy Bible,  the creation fable and the miracles don't you know, but somehow it's not quite as literally true where Jesus says a camel will pass through the eye of a needle before a rich man gets into Heaven. Matthew 19:23-24. 

           They condemn any attempt to rein in "free market" corporate greed as "socialism," blithely ignoring the fact that the church of the apostles was organized on the most basic socialist principle, taking from each according to his means and giving to each according to his need.  Acts 4:32-35. That part of the New Testament, unlike the miracles, is probably literally true.  So, if America's really a "Christian nation" as the Bible thumpers say when preaching "family values," telling people who they can love and who they can't, why don't they also demand that we socialize important economic needs like health care?

         Meanwhile, as the corporate wing of the GOP has succeeded in dumbing down the political debate, over issues like gay marriage, abortion, school prayer, evolution, et cetera, they've been diligently working, Wizard like behind the curtain, milking the working class and middle class dry of our savings, our homes, our jobs and pensions, all enabled by Reagan's mindless philosophy of "small government" which became deregulation on steroids during the Bush regime. 

          Thomas Frank's What's The Matter With Kansas is an excellent exposition of how it has worked in the microcosm of Kansas politics, with rich folks who most likely won't pass through the proverbial needle's eye manipulating the faith-based prejudices of the less fortunate plain people into voting Republican.  The Supreme Court's recent ruling in Citizens United v. FEC will, of course, make that a lot easier in the upcoming mid-term elections this November.

          The past thirty years, since Reagan was swept into office on a tidal wave of "family values" politics -Hollywood divorcee that he was notwithstanding -have seen an ever increasing financialization of the American economy.  Over this period, the relative positions of manufacturing and finance have switched places, both as to percentage of GDP and percentage of gross corporate profitability.  The reason is clear, too.  Without government oversight via tax policy and regulation to direct the economy as in Teddy Roosevelt's vision, lenders simply go where the quickest, easiest money comes from, and it's not from supporting a strong industrial base for the nation -as Colonial Secretary Joseph Chamberlain presciently observed in 1904 before the once mighty British Empire became a second-tier nation.

          GOP apologists try to deflect blame for the crash of 2008 away from the free market ideology that they've been weaned on, by bleating about the sub-prime mortgage market and blaming Barney Frank for it -as if everything else leading up to 2008 was just hunky-dory.  The fact is, however, that it wasn't sub-prime mortgages that caused the whole economy to crash -they were just the last straw on a very weak camel's back.  Hedge funds and LBOs as well as home mortgages across the board, unregulated over the counter derivatives, CDOs and CDSs, were all based on inflated asset valuations, with nobody looking over the bankers' shoulders to rein in the excesses and the outright fraud in many cases. 

          Sub-prime loans were a catalyst only because they were the weakest part of a financial house of cards, a vast Ponzi scheme which had become, through financialization of the economy, the logical end result of Reaganomic laissez faire ideology.  Sub-primes were simply the first segment of the over-financialized economy to fail because the borrowers were in the weakest position to begin with.  By 2006, they accounted for only 20 percent of the mortgage market as a whole.  If underlying real assets across the board were appropriately valued, not just those with sub-prime mortgages, lending to underqualified borrowers would not have caused the whole economy to crash. 

           To see what I mean, take a walk through Downtown Crossing in Boston and look closely at the empty shell of what once was Filene's.  It's empty now because Macy's was allowed to buy up all its competition with leveraged funds, putting about half the large-retailer workforce in downtown Boston out of work.  Then the developer who bought the property from Macy's,  with borrowed money to be sure, ran out of cash. As Warren Buffet has remarked, the so-called "invisible hand" that  free market ideologues like Reagan and Brown naively believe in, is really the invisible foot -and it's now kicking the middle class in the butt.

          Why would lenders allow something like that to happen you ask.  It's simple.  They believe in the philosophy of Gordon Gekko -greed is good.  When you're in the business of lending money, you make more money if you can charge more interest.  That's done two ways, charging a higher interest rate as with risky sub-prime mortgages, and lending a larger volume of money by basing loans on inflated values of the underlying assets.  Its a scam, basically gambling with other people's money, and it's not good economics or ethics, as Teddy Roosevelt recognized over 100 years ago.

          Rising property values attract a large number of buyers interested only in investment, rather than  home-ownership, i.e. idle gamblers who produce nothing of real value, and that pushes real estate "values" even higher. Bundling mortgages as unregulated "securities," more non-productive gambling, also increases the large institutional lenders' bottom line.  For individual bankers, of course, the larger the volume of interest income, the larger the annual bonus.  Like Gordon Gekko said . . .  that, plus, the expectation that the federal government will step in with generous bailouts, keeping the profits privatized while socializing the risk.

             Today's New York Times has an interesting story about AIG in the Business section, documenting that risky trading in derivatives was not limited to fringe players as some GOP apologists for corporate greed want all you middle class Scott Brown voters to believe.  Meanwhile, the Globe has a story on the front page about how Senator-elect Scott Brown collected $450,000 in the days before the special election from financial industry executives -with about 80 percent of that money coming from out of state.  

            A response to an earlier post on Senator Cosmo Boy claimed that I was getting a lot out of the "snippet" I quoted above from his WBUR interview, how he doesn't want to regulate finance and instead trusts "free enterprise" to work things out,  but it seems I've got company here.  The  financial industry nationwide seems to have gotten the same message I did from that quote, with one difference.  They really liked what he was saying, to the tune of nearly a half-million dollars,  and unless you're playing the same game they are you might want to reconsider before November  if you thought it was a good idea to vote for him -or any other Republican candidate ever.

            The financiers' political spending-spree came about just as President Obama and the Congressional Democrats began pushing real reforms to rein in the financial industry, including regulatory oversight and rational tax policy to ensure that private corporations existing under the laws of this country serve the general welfare of the American people.  What a coincidence!

           That kind of corporate accountability, the regulatory reform the Democrats are pushing,  is what Republican President Teddy Roosevelt demanded back when Republicans stood for something other than berserk religious intolerance and unrestrained capitalist greed.  That was shortly after Congress reined in corporate excess in America through the Sherman Anti-Trust Act, while Great Britain's inevitable decline was gaining momentum, as Secretary Chamberlain had warned, in large measure due to the increasing dominance of finance in its national economy.   As Yogi Berra said, for us in America today, it's like deja vu all over again.  

           Someone should put Scotty Boy on the hot seat about that little "snippet" about "free enterprise," especially the part about the financial industry being "creative."   Just what does he mean here by creative?  Is it  the hedge funds, the LBOs, the CDOs, the CDSs and all the other really creative ideas the Wizards of Wall Street have used to financialize our economy based on "free market" ideology, the  loose regulation,  the maximization of return via tax policy as with the capital gains tax, the minimization of risk via bailouts and outright fraud in the valuation of assets?   If not, what other, different "creative" ideas does the financial industry have, the folks who supported his candidacy so generously, that can turn the economy around without significant and intelligent regulatory oversight?

           Depending on his answer to that question, the only remaining question is whether he's just Senator Cosmo Boy, Sarah Palin with a schlong -his truck driving beefcake matching her airhead cheesecake appeal to an easily manipulated electorate.  Or does he really understand how unregulated financialization has wrecked our economy, and it's okay with him because he's getting a piece of the action or expects to in return for the support of the fat cat financiers who bankrolled his campaign?   Those two alternatives, of course, really aren't mutually exclusive.