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The Economic Collapse Mark Levinson The Economic Collapse Mark Levinson Dissent, Volume 56, Number 1, Winter 2009, pp. 61-66 (Article) Published by University of Pennsylvania Press DOI: https://doi.org/10.1353/dss.0.0011 For additional information about this article https://muse.jhu.edu/article/256426 [ This content has been declared free to read by the pubisher during the COVID-19 pandemic. ] The Economic Collapse Mark Levinson high leverage, is now extinct. Lehman Broth- ers has gone bust, Bear Stearns and Merrill Lynch have been swallowed by commercial banks, and Goldman Sachs and Morgan n the fall of 2008, a little more than a Stanley have become commercial banks them- year after the Bank for International Set- selves. The “shadow banking system”—the se- tlements (a Switzerland-based organiza- curities dealers, hedge funds, and other tionI that fosters cooperation between central non-bank financial institutions that defined banks) warned that “years of loose monetary deregulated American finance—is unraveling policy have fuelled a giant credit bubble, leav- as I write. ing us vulnerable to another 1930s slump,” the The credit shock is reverberating across the combustive concoction of free market funda- world. In Europe, economies are unraveling mentalism, corporate-dominated globalization, after ten years of growth financed by borrow- stagnant wages, growing inequality, greed, ex- ing. For much of the past year the emerging cessive leverage, and financial innovations such world watched the Western financial hurricane as securitization finally exploded. from afar. Their own banks held few of the Financial market conditions in the OECD mortgage-based assets that undid the rich countries sunk to their lowest levels in more world’s financial firms. Commodity exporters than half a century, and the U.S. government were thriving, thanks to high prices for raw ma- made its most dramatic interventions in finan- terials. Even as talk mounted of the rich world cial markets since the 1930s. The Federal Re- suffering its worst financial collapse since the serve and the Treasury nationalized the Great Depression, emerging economies seemed country’s two mortgage giants, Fannie Mae and a long way from the center of the storm. Freddie Mac; bailed out AIG, the world’s larg- No longer. As foreign capital has fled and est insurance company; and, in effect, extend- confidence evaporated, the emerging world’s ed government deposit insurance to $3.4 stock markets have plummeted (in some cases trillion in money market funds. losing half their value) and its currencies have Then, in the largest government rescue op- tumbled. The seizing up of the credit market eration in history, Treasury Secretary Henry caused havoc, as foreign banks abruptly Paulson announced a plan to buy up to $700 stopped lending and stepped back from the billion of toxic securities from troubled banks. most basic banking services. Even China’s eco- Incredibly, Paulson’s original plan, only three nomic juggernaut started to slow. typed pages, would have given Wall Street al- This is no ordinary business cycle down- most unrestrained access to public revenues at turn. It is a crisis of a failed thirty-year eco- little cost. The Treasury plan was rejected by nomic and social model. It started in the late the House of Representatives and subse- 1970s, when a resurgent business community quently modified by the Senate. The version won support for the argument that inflation approved by Congress promises to make a and low growth were the result of too much larger share of any subsequent profits into pub- public spending, too much taxation, too much lic revenues. union power. Instead, we would rely on what The landscape of American finance has Ronald Reagan once called “the magic of the radically changed. The independent invest- market.” In Newt Gingrich’s Contract With ment bank, a Wall Street animal that relied on America, that “magic” gave free license to the DISSENT / Winter 2009 ■ 61 THE ECONOMIC COLLAPSE anti-tax, anti-government, pro-deregulation in- slump, as happened in the 1930s. stincts of an increasingly fervent Republican Party. President Bill Clinton, triangulating the he growth of the financial sector rela- Gingrich revolution, declared that “the era of tive to the real economy—to the point big government is over” and abolished the T where it has recently accounted for one- Glass-Steagall Act, which provided for regula- third of U.S. corporate profits—was built on a tory firewalls between commercial banks, in- now rapidly collapsing house of cards. An out- surance companies, securities firms, and of-control financial sector also lies behind the investment banks (see Timothy Canova’s destructive wave of private-equity buyouts that “Legacy of the Clinton Bubble,” Dissent, Sum- have has saddled productive companies with mer 2008). The Bush presidency sealed the huge and perhaps unmanageable debts, and market fundamentalist victory. wild, speculation-driven gyrations in energy, In this climate, banks, and especially the food, and other commodity markets. These unregulated shadow banking system, devel- have had particularly devastating consequences oped fiendishly complex, sometimes outright for poor developing countries. fraudulent products and then generated huge “The crisis,” according to Nouriel Roubini, purchases of these “assets” by other parts of who along with a few others** has been pre- the financial system through massive exten- dicting this catastrophe for several years, “was sions of credit. caused by the largest leveraged asset bubble Wall Street executives made huge amounts and credit bubble in the history of humanity of money as the real estate and other asset . a housing bubble, a mortgage bubble, an bubbles expanded. Chuck Prince, ex-CEO of equity bubble, a bond bubble, a commodity Citigroup, expressed the outlook of the herd bubble, a private equity bubble, a hedge funds of independent minds that run our major fi- bubble are all now bursting at once in the big- nancial institutions when, before the market gest real sector and financial sector deleverag- burst, he told the Financial Times, “When the ing since the Great Depression.” music stops, in terms of liquidity, things will U.S. policy has created a global market with be complicated. But as long as the music is no rules other than those designed to protect playing you’ve got to get up and dance. We’re economic elites. American workers have been still dancing.” Eventually, the music stopped, fully exposed to competition from low-wage Citigroup lost tens of billions of dollars, and economies. The resulting downward pressure Prince lost his job. on wages and the soaring trade deficit should No one in the interconnected world of glo- have shrunk U.S. consumer spending. But bal finance knows who is holding the most debt-financed asset bubbles provided an illu- toxic assets and who is on the hook for losses sory way for the economy to generate growth. if and when borrowers default. The financial Countries that run trade surpluses with the sector spread the huge risks it had created in such a way that few, if any, islands of security *As recently as 2005, when talking about the housing bubble, remain intact. For example, subprime mort- Alan Greenspan said that “widespread securitization of mort- gages were bundled together with other types gages make[s] it less likely” that price declines would “have substantial macroeconomic implications.” The very thing of mortgages and corporate bonds. And, as Greenspan thought would reduce risk, in fact, spread risk. Richard Bookstaber, author of A Demon of Our Own Design, put it, “Like a kid who **Dean Baker deserves special mention for sounding the alarm about our bubble economy for years. Eight years ago, brings his cold to a birthday party, the sickly he wrote in these pages, “It is hard to get a good view of the subprime mortgages mingled with these other economic landscape from inside a bubble . There is likely instruments. The result was contagion be- to be a whole range of accounting and financial sins that tween markets.”* No one can be certain about will be exposed in the deflation of the bubble . .Many the staggering scale of the eventual financial other forms of creative bookkeeping will come to light after a market crash has made them impossible to sustain. Only losses, which the IMF now puts at $1.4 tril- after the crash will it be possible to determine the extent to lion, or whether they will precipitate not just which the financial system is crippled.” (“Holes in the ‘New a recession but a deep and protracted global Economy,’” Dissent, Summer 2000). 62 ■ DISSENT / Winter 2009 THE ECONOMIC COLLAPSE United States, especially China, are re-lend- reached levels not seen since the Gilded Age ing the dollars they earn back to the United of robber barons. States in order to maintain the U.S. market for There is one measure that did very well their exports. The Chinese and others, by peg- during the Bush years—corporate profits. ging the value of their currency to the dollar, While aggregate wages and salaries grew less also do not allow their currencies to appreci- than half as fast after 2001 as they did in the ate. In this way, our trading partners enabled average postwar expansion, corporate profits us to keep purchasing from their factories even grew almost 30 percent faster. The increased as our real economic capacity declined. profitability in 2005-2007 relative to the late As economist Tom Palley explained, in a 1970s, according to calculations from the EPI, paper for the Economic Policy Institute’s meant that a staggering $206 billion was trans- Agenda for Shared Prosperity, ferred from labor to capital incomes. This new system has boosted profits by allow- The global financial crisis will make a ing companies to establish export-production weak U.S.
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