Part 11 of my diary series on the history of multinational corporations. This part covers the neocons and the Dubya era.
This is a book manuscript I am working on that I am posting, one piece at a time, as it is written. Links to the other 10 sections are below.
The other installments, for those who didn't see them or don't remember them, are here:
Part One: The Anti-Corporate Revolution of 1776
Part Two: The Robber Barons
Part Three: The Progressive era
Part Four: The Roaring Twenties
Part Five: New Deal and World War 2
Part Six: The Organization Men
Part Seven: The Man
Part Eight: the Reagan Revolution
Part Nine: The Multi-National Wars
Part Ten: NAFTA and WTO
Eleven: The Failed American Century
By 1999, the WTO was facing active global opposition. At the third Ministerial Conference in Seattle, WTO officials found themselves besieged by a storm of street protests and riots, as a broad coalition of labor, environmental, and social justice organizations, joined by an incongruous contingent of right-wing “America First” nationalist groups, demonstrated against the Washington Consensus, the WTO’s supra-national authority, and the entire process of corporate globalization. Inside the convention hall, meanwhile, delegates from the developing nations were equally hostile, complaining bitterly about their relative lack of influence (filing and defending against complaints were both very expensive, and although WTO offered developing nations free legal and procedural help, it was minimal, and not enough to bring any parity of influence), about the domination of WTO’s agenda by the large rich nations and multinational corporations, and about the devastating effects that many of the small poorer nations had suffered as the multinational corporations flocked to their countries and turned them into economic vassal states. When the Dohan Round began in 2001 with the agenda of expanding WTO’s reach into new areas of economic and public policy, it was derailed by a coalition of delegates from developing nations, who managed to stall discussion until the entire process collapsed at a meeting in Cancun in 2003. Plans for expanding WTO (and particularly for a comprehensive new set of trade agreements based on the Multilateral Agreement on Investments, or MAI) were indefinitely shelved, and have been at a standstill ever since. By 2002, a sizeable number of economists and politicians from around the world were already pronouncing the Washington Consensus “dead”.
The most visible conflict with the Washington Consensus and its WTO structure by this time, however, came from within Washington itself.
The George W Bush administration preferred to negotiate bilateral agreements directly between the US and other countries—one such example being the Central America Free Trade Agreement (CAFTA) signed in 2005. Through such bilateral agreements, they hoped to reassert American supremacy and its independence from the WTO and the UN.
The theorists of this agenda were a group who became known as “neo-conservatives” or “neocons”; they preached a “New American Century” in which, like the glory days of the 1950’s, America’s hegemony in the world would be unsurpassed, unchallenged and unquestioned.
To understand the corporate history of the George W Bush years, it is important to understand the neocons and their agenda. Many progressives have unfortunately attributed positions and agendas to the neocons which they did not in fact have. The neocons are often conflated with the fundamentalist culture warriors of the Religious Right, who quite literally wanted a theocratic state that would rule according to fundamentalist Christian ideology. In reality, although the neocons formed a political marriage of convenience with the fundamentalists and paid them some lip service, they always thought that the Religious Right ayatollah-wanna-be’s were nutty and anti-democratic, and one of the first actions carried out by the neocons when they finally assumed dominant power in the George W Bush administration was to remove the fundamentalists, including the most visible of the culture warriors, Attorney General John Ashcroft (who famously covered up the bare-breasted statue of Justice in his building because it was ungodly).
Progressives also tend to mistakenly attribute an actively pro-corporate agenda to the neocons; in reality, none of the neocons were corporate officers (unlike the political leadership in both the Republican and Democratic Parties who set up the WTO structure in the first place), and they had no interest in representing or defending corporate interests—indeed, the intensely nationalistic neocon agenda of unilateral American hegemony was diametrically opposed to the interests of the supra-national corporations, who were now active all over the world and no longer had any “American interests” to defend. The neocon agenda focused almost entirely on military and foreign policy; in their writings, the words “free trade”, “World Trade Organization”, “World Bank” or “free market” barely appear at all—and when they do, it is only to discuss their utility as instruments of American military and political power.
It is also incorrect to identify the neocons with the Republican Party—most of them began their political careers as Democrats.
Ironically enough, the neocon school, which dominated the agenda of the American conservative movement for an entire decade, began its life as a wing of Communist ideology. Nearly all of the neocons were (or were the children of) European Jewish immigrants who had fled Nazi Germany or the USSR, and nearly all of them began their political lives as Trotskyites who were opposed to the Stalinist regime. This later turned into a fanatical anti-communism, and then a hostility to those liberals that they viewed as being too soft on Communism. The neocons were fiercely enthusiastic Cold Warriors, always eager to confront the USSR, militarily when possible.
In the late 1960’s, most of the future neocon movement had moved from Trotskyist groupuscules to the Democratic Party, particularly around Senator Scoop Jackson, where their primary goal was to prevent the Democratic Party from “surrendering” in Vietnam. They also preached an unswerving support for the Jewish state in Israel. By the time of the Carter administration in 1977, the neocons viewed the Democratic Party as too disorganized and weak to effectively protect democracy in the world, and they turned to Reagan and the Republicans instead in 1980. Many neocons then assumed key posts running the Central American proxy wars, but during his second term, Reagan rejected the neocon agenda and opened arms-control negotiations with the USSR.
During his Presidency, George HW Bush derided the neocons as “the crazies in the basement”—when the neocons in the Defense Department prepared a classified Defense Planning Guide spelling out the neocon goal of “benevolent global hegemony” and then leaked it to the press, the reaction was widespread outrage and condemnation, and Bush ordered the report re-written, and subsequently banished the neocons from his administration.
The Clinton years were also a decade of exile for the neocons, who churned out largely-ignored “position papers” for various think tanks, including their own umbrella organization, the “Project for the New American Century” (PNAC). The neocons finally got their chance at undiluted power after the 9-11 terrorist attacks in 2001, when the United States lost its collective mind and lurched sharply into vengeful militarism.
But before that time, the corporate agenda was very different.
A Multi-National World
The multi-national world that appeared in the realm of economics at the end of the 1980’s had its parallel in the political realm as well. When the Soviet Union collapsed in 1989 and the Cold War came to a sudden end, it was assumed by many that the world would now become unipolar and would revolve around the United States, the “sole remaining superpower”. Instead, something quite different happened—the world became increasingly multi-polar, and far from being a domineering emperor, the US became a facilitator and mediator as important global political and military decisions were carried out by large international coalitions in which the US, as the largest economic market and most powerful military, still played a central role, but, with its economic power checked by the growing reach of the supra-national corporations and new economic powers like China, was no longer able to act unilaterally, and was now reduced to the position of “first among equals”. It became known as “The New World Order”.
The dynamics of the New World Order could be clearly seen in the first significant military action to occur after the end of the Cold War—the international reaction to the invasion of Kuwait by Iraq. On August 2, 1990, Iraqi troops invaded the small country of Kuwait. The two countries had a long-running border dispute, and Iraqi President Saddam Hussein angrily accused the Kuwaiti emir of “slant-drilling” underneath the border into Iraqi oil deposits. The Iraqi forces occupied the country within days, deposed the Emir, and announced that Kuwait was now an Iraqi province.
In the days of the Cold War, such a move would never have happened without the backing of one of the superpowers (and the opposition of the other superpower). Hussein had long been an American ally in the region, having received US support during the eight-year Iran-Iraq war. Times were different now, however; the Cold War was over, and Iraq’s invasion brought swift condemnation from nearly every country as a blatant act of aggression and a violation of international law. The United Nations stepped in quickly; just four days after the invasion, the UN Security Council voted to impose heavy economic sanctions against Iraq until it withdrew from Kuwait. Combat troops from UN member nations poured into neighboring Saudi Arabia (under the command of US General Norman Schwarzkopf), and on November 29 the UN authorized the use of military force to expel Iraqi troops if they did not leave by January 15, 1991. Over half a million troops from the US and another quarter-million from 28 other countries, including the Arab League, were in place. It was the largest deployment of troops since the Second World War. Early on January 16 the Coalition forces in Saudi Arabia launched a massive series of air strikes (Operation Desert Storm), moved into Kuwait, and the Iraqi army collapsed and surrendered en masse. Although the neocons and other hawks in the US called for the invasion of Baghdad and the removal of Saddam Hussein, Bush declared that he would not exceed his UN mandate, and halted military operations once Iraqi forces were out of Kuwait.
In his speeches, Bush declared that the leading role played by the United Nations and by the international coalition of troops signaled the end of the Cold War and the beginning of a new era of multi-national cooperation. As he asked Congress for the funding to move troops to Saudi Arabia, Bush declared, “This is not, as Saddam Hussein would have it, the United States against Iraq—it is Iraq against the world . . . A new partnership of nations has begun, and we stand today at a unique and extraordinary moment. The crisis in the Persian Gulf, as grave as it is, also offers a rare opportunity to move toward an historic period of cooperation. Out of these troubled times, our fifth objective—a new world order—can emerge . . . an era in which the nations of the world, east and west, north and south, can prosper and live in harmony. . . A world where the rule of law supplants the rule of the jungle.”
As the bombing campaign began, Bush announced “This is an historic moment. We have in this past year made great progress in ending the long era of conflict and cold war. We have before us the opportunity to forge for ourselves and for future generations a new world order—a world where the rule of law, not the law of the jungle, governs the conduct of nations. When we are successful—and we will be—we have a real chance at this new world order, an order in which a credible United Nations can use its peacekeeping role to fulfill the promise and vision of the UN’s founders.”
After the war ended, Bush said, “Until now, the world we’ve known has been a world divided—a world of barbed wire and concrete block, conflict and cold war. Now, we can see a new world coming into view, a world in which there is the very real prospect of a new world order. In the words of Winston Churchill, a ‘world order’ in which ‘the principles of justice and fair play . . . protect the weak against the strong.’ A world where the United Nations, freed from Cold War stalemate, is poised to fulfill the historic vision of its founders. A world in which freedom and respect for human rights find a home in all nations. The Gulf War put this new world to its first test, and, my fellow Americans, we passed that test.”
Extremist right-wing ideologues derided the “New World Order” as a Communist world government, and dreamed up paranoid delusions about black helicopters from the UN carrying Chinese troops to invade the United States. But in reality Bush’s vision was perfectly in line with the new economic reality, where supra-national corporations now held sway, where national governments now no longer had economic power, and where economic conflict was now to be avoided through cooperative mergers, agreed-upon trade rules, and global expansion.
The next President, Bill Clinton, continued Bush’s program of international cooperation rather than unilateral American action, following the UN’s lead during the crisis in the Balkans when Serb nationalists carried out “ethnic cleansing” in Bosnia and elsewhere, provoking a UN military peace-keeping mission.
Embracing the term “globalization” to refer to the new world order, Clinton also expanded it to include the economic sphere. It was Clinton who signed the NAFTA agreement (negotiations which had begun under Bush), and who then played a leading role in establishing the WTO and began negotiations towards a hemisphere-wide Free Trade Area of the Americas (FTAA). This worldwide free trade structure, Clinton announced, would establish “an expanded system of rule-based trade that keeps pace with the changing global economy and the changing global society”. By the end of the Clinton Administration, the supra-nationals had gotten what they wanted—a global rules-based system that allowed them to avoid crippling trade wars (such as had occurred in the 80s) by granting every corporation equal access to every market, and removing the ability of any national government to interfere. The core value at the root of this system was that any corporation, anywhere, had the same access to any market as any other corporation, and no one had a privileged position. It was the corporate version of “democracy”.
A New World War
The neocon agenda ran headlong into that corporate vision of “equal access for all”. The neocons utterly rejected the very idea of the New World Order and globalization, and argued instead for a return to unilateral American power. Stated in its bluntest terms, the neocon agenda is one of transforming the United States into a military national-security state, which would then relentlessly (and unilaterally) use raw naked military force to remake the entire world in America’s image, converting everyone everywhere into a democratic capitalist state under American tutelage. PNAC’s Statement of Principles declares its intention to “shape a new century favorable to American principles and interests” through “a military that is strong and ready to meet both present and future challenges; a foreign policy that boldly and purposefully promotes American principles abroad; and national leadership that accepts the United States’ global responsibilities.” “The history of the past century,” PNAC concludes, “should have taught us to embrace the cause of American leadership.” The prophet Mohammed had brought Islam to the known world at the point of a sword—the neocon prophets intended to bring democracy and freedom to the known world at the point of an M16 rifle. Whether the world liked it or not.
For every foreign policy trouble spot, the neocons had a military solution. “At present,” PNAC wrote, “the United States faces no global rival. America’s grand strategy should aim to preserve and extend this advantageous position as far into the future as possible. . . . Preserving the desirable strategic situation in which the United States now finds itself requires a globally preeminent military capability both today and in the future.” The neocon aim was, they openly declared, “a blueprint for maintaining US preeminence, precluding the rise of a great power rival, and shaping the international security order in line with American principles and interests”—to “preserve Pax Americana”.
While the US at the end of the Cold War cut its military budget and reduced its forces (particularly under the George HW Bush administration), the neocons called instead for an immense increase in military spending. The Army, the neocons declared, was “the essential link in the chain that translates US military supremacy into American geopolitical preeminence”; the Air Force would be transformed into “a global first-strike force”; the Navy was to be put into “a position of unchallenged supremacy on the high seas; surpassing even that of the British navy in the 19th and early parts of the 20th century.”
In Europe, PNAC saw a potential threat to American interests from the European Union; “It is important that NATO not be replaced by the European Union, leaving the United States without a voice in European security affairs.” To counter this, the neocons advocated the expansion of NATO and the relocation of American military bases in Europe to give the US a bigger role in areas like the Balkans.
During the 1990’s, the primary short-term focus of neocon attention was the Middle East—American control of the Middle East would, the neocons argued, remove unelected autocracies and make them democracies. In the aftermath of Operation Desert Storm, the US was maintaining permanent military forces in Kuwait and Saudi Arabia, and the neocons planned to use them to transform the entire region. The first target would be Iraq, where Saddam Hussein was still thumbing his nose at the Americans. Once Hussein was removed and Iraq was established as a US base, it could be used as an advance staging area for operations against Iran, a longtime opponent of US interests, and then onward to Syria, which was funding anti-Israel and anti-US forces like Hezbollah and Hamas. Saudi Arabia, with its autocratic government and its tacit support for anti-American terrorists, would also be subject to “regime change”. In the end, the Middle East would be forcibly transformed into a series of American-friendly democracies, giving the US de facto control over most of the world’s oil resources.
It was China, however, which the neocons viewed as the only real challenge to American hegemony. And, typically, the neocon solution was military: “Raising US strength in East Asia is the key to coping with the rise of China to great-power status.” Neocons argued for increased US military forces in Japan and South Korea (and the possible overthrow of the Chinese ally in North Korea), as well as expanded US military presence (especially naval forces) in Southeast Asia, particularly in the crucial Moluccan Straits, through which the majority of Chinese trade (and its imported oil) passes. Neocon plans called for some two-thirds of the US Navy to be relocated in the Pacific.
The neocons also advocated that the US should unilaterally modify or abandon most international arms-control agreements, which, they argued, limited America’s ability to maintain its position as the dominant military force.
“The Post-9/11 World”
The antagonism of the neocon agenda and the multilateral New World Order came to a head in the War on Terror and the second Iraq War.
Iraqi President Saddam Hussein had remained a target of the neocons since 1991’s Desert Storm. The primary attraction of Iraq for the neocons was oil, but not in the sense that most progressives assumed at the time. It was not the profits of the oil companies that mattered to the neocons—their interest was strategic and geopolitical, not economic. The neocons recognized that every modern military force was utterly dependent upon oil; every tank that rolled, every jet that flew, every naval task force that sailed, was completely dependent upon petroleum fuel, and, although the United States got nearly all of its imported oil from Nigeria, Mexico and Canada, most of the world, including all of America’s potential rivals, got their oil from the Middle East. By controlling the Middle Eastern oil fields, the neocons realized, the US could keep its own supply lines free while at the same time controlling the flow of oil to Europe and, particularly, China. It would be a geopolitical and military boot on their necks.
A “regime change” in Iraq, therefore, in which Saddam Hussein would be replaced by an American-friendly government, was seen by the neocons as merely the first step of a grand program to transform the entire Middle East into an American-controlled oil spigot which Washington could turn on or off at will. All that was needed, the neocons noted in 1996, was a “Pearl Harbor event” that would give them the opportunity to put the plan into action. It came on September 11, 2001.
Within weeks of the Al Qaeda attacks, the neocons were making frantic efforts to convince everyone that now was the time to take out Saddam as a way to assert American global dominance and to remake the entire Middle East. Spurious claims based on cooked intelligence were made linking Saddam to terrorism and to weapons of mass destruction, including nuclear weapons.
And Iraq, the neocons declared, would just be the first step. In a National Review article in 2002, Jonah Goldberg declared, “Every ten years or so, the United States needs to pick up some crappy little country and throw it against the wall, just to show the world we mean business . . . There are plenty of excellent geostrategic, legal and political arguments in favor of regime change in Iraq . . . The United States needs to go to war with Iraq because it needs to go to war with someone in the region, and Iraq makes the most sense.” In June 2002, a classified Defense Policy Board briefing paper, leaked to the press, argued that a friendly regime in Iraq would end American dependence in the region on the Saudi government, allowing the US to “deal with” the Saudi Arabian royal family’s support for militant Islamic and anti-Israel groups. In the neocon dream, regime change in Iraq would give the US a base from which to remove unfriendly regimes in Iran and Syria as well. In their book The War Over Iraq, neocons William Kristol and Lawrence Kaplan declared, “The mission begins in Baghdad, but it does not end there.” In September 2002, the neocon agenda was officially enshrined in US military policy as part of the “War on Terror”, when the Pentagon’s new National Security Strategy report declared the policy of unilateral preemptive warfare—“We will not hesitate to act alone, if necessary, to exercise our right to self-defense by acting preemptively.”
In 2003, the neocons got their wish. Just as American forces had the Al Qaeda leadership pinned down in Tora Bora, Afghanistan, they were withdrawn for the invasion of Iraq. American forces overran Iraq in a matter of weeks; Saddam Hussein was, after a long search, arrested, given a “trial” and then hung.
American naval forces were also concentrated in the Moluccan Straits, ostensibly in an operation against pirates from Indonesia as part of the War on Terror. The US soon had active military bases in over half the countries in the world, and was spending more on military affairs than the entire rest of the planet combined. Coincidentally, the US Navy was deployed in exactly the right spots to potentially cut off the flow of Middle East oil to China—a fact that did not go unnoticed by Beijing, which soon began beefing up its own naval forces in the area.
“The Oil War”
Progressive opponents of the Iraq invasion viewed it, for the most part, as a “corporate war” carried out in the interests of oil company and defense contractor profits. In reality, however, the entire neocon agenda, and the Iraq invasion in particular, was directly in conflict with the rules-based multilateral international economic approach that had already brought the supra-nationals over a decade of unprecedented riches and prosperity, and the Iraq invasion faced a wave of corporate protest.
The neocons had never been very sympathetic to corporate economic interests. As far back as 1996, they had been declaring that Clinton’s willingness to use government diplomacy to support globalization of business, and particularly his inclusion of China as an economic player, was weakening America’s position of strategic dominance: ”The promise of short-term economic benefits threatens to override strategic considerations”. In a 1997 article in New Republic, Robert Kagan wrote, “Not since the 19th century has international trade been so exalted as the single cure for all of humanity’s most persistent maladies, from tyranny and oppression to international disputes and war . . . We forget, because the theory was discredited by the two world wars of the 20th century . . . Although corporate leaders can be expected to ask the government to help them out abroad, it is still the job of our political leaders sometimes to say no. The unwillingness of recent American governments to keep business interests in their place has become dangerous.”
Immediately upon reaching power, the neocons signaled to the world that American support for the rules-based global multilateral economic structure was over—from now on, nationalistic American interests came first. While the George HW Bush and Bill Clinton administrations had made every effort to bring China into the international economic framework, the George W Bush administration worked just as hard to throw every obstacle they could in China’s way, in an unsuccessful attempt to derail China’s entry into the WTO. Even before then, tensions with China had risen sharply in 2001 when an American spy plane and a Chinese fighter jet collided in Chinese airspace, and when the Bush administration sold a supply of navy ships to Taiwan.
The Bush administration also signaled its contempt for the multi-national globalists by appointing neocon theorist Paul Wolfovitz as President of the World Bank, and by unilaterally imposing a set of protective tariffs on imports of steel, provoking howls of outrage from Europe, China, Japan and others, and leading to a WTO judgment against the US. By September 2003 the United States had a long list of WTO rulings against it, and the New York Times was reporting, “Top officials at the World Trade Organization say they are worried that the Bush administration’s go-it-alone policy is threatening international trade.”
The neocon go-it-alone policy extended beyond the economic sphere. When the United Nations refused to give its approval for an invasion of Iraq, the US announced that it would invade anyway. European authorities, both political and economic, erupted in a storm of protest to what was, in effect, a direct American thumb-nosing at the very basis of the global political structure. Political leaders condemned the invasion as an aggressive war and a violation of international law, while economic authorities and corporate officers declared that an invasion would interrupt the oil supply, lead to increased terrorism, and cripple economic growth. In February 2003, a Newsday journalist who had been granted access to the World Economic Forum meeting of global business and political leaders, reported, “The rich—whether they are French or Chinese or just about anybody—are livid about the Iraq crisis because they believe it will sink their financial fortunes.”
Many prominent American companies worried openly that an invasion would provoke a wave of anti-US sentiment across the world that would cripple their global business interests and expose them to terrorist attacks. (They turned out to be correct; at least four Kentucky Fried Chicken franchises in Pakistan have been bombed or burned by anti-American protestors during the Afghan and Iraq wars, as well as a number of McDonalds in Pakistan and Indonesia. And a 2005 article in US Banker magazine reported that large numbers of people worldwide declared that they were “less likely to purchase American products because of Bush administration policies”, including 41% of Canadians, 56% of British, 61% of French, 49% of Germans, and 42% of Brazilians.)
In March 2003, the Washington Post reported, “Discord over the Iraq War is putting uncomfortable strains on economic links between the United States and Europe . . . Lingering acrimony among top policy-makers will spark tit-for-tat trade wars and wreck the US-European cooperation needed to strike a worldwide trade accord.”
Bush responded by deriding anti-war allies as members of “Old Europe” and by banning Iraq reconstruction contracts for companies from countries who opposed the war—at the same time, the administration used a combination of threats to cancel economic aid and rewards of debt forgiveness to cajole other countries into joining the “Coalition of the Willing”.
Even the global oil companies, who had most to gain from an invasion of Iraq, were skeptical. Saddam Hussein had been a friendly strongman for years and had granted lucrative concessions to the oil companies, and they feared the potential chaos that could result from his removal. A 2003 article in Mother Jones quoted oil industry consultant Ibrahim Oweiss as saying, “I know that the oil companies are scared about the outcome of this. They are not at all sure this is in the best interests of the oil industry.”
Ultimately, nothing turned out as the neocons thought it would. Rather than being greeted as liberators in a short and cheap war, the US was bogged down in a long deadly insurgency that cost over a trillion dollars; instead of regime change in Iran and Syria, they were strengthened as regional powers; and instead of leading the nation back to a position of global dominance, the Bush Administration led it to disaster and became an international pariah.
Even the corporations who were drawn to Iraq by fat no-bid reconstruction contracts went away disappointed; in 2006, Bechtel Corporation announced that it was leaving the country—despite some $3 billion worth of contracts over three years, the costs of security in the face of the insurgency (Bechtel had almost 100 of its employees killed or wounded) had made it too difficult to make any profits.
In the run-up to the Iraq invasion, the neocons had arrogantly declared, “Power creates its own reality.” In the end, however, the neocons faced the bitter lesson that when ideology confronts reality, reality wins every time.
It was not solely the militaristic agenda of the neocons that failed spectacularly in the 2000’s—the close of the first decade of the 21st century also saw the entire Reaganite “free market” ideology collapse into the largest economic disaster since the Great Depression.
During the Clinton era of globalization and deregulation, the banks were flying high. The real estate market was booming; between 1997 and 2006, the average price of a home more than doubled, while interest rates dropped to record lows. To many, it looked as if the bubble would never end, and they rushed to cash in. Speculators hurried to buy houses now that they could sell at a profit later when the value went up. Homeowners eagerly took out low-interest second mortgages to finance vacations, cars or other splurges.
Mortgage banks realized that they could make a ton of money by selling mortgages to anyone and everyone, and the criteria for loans became progressively looser. These loans to people with shaky credit ratings were known as “subprime mortgages”. For the banks, any subprime mortgage they could sell was a win-win deal. If the buyer paid it off, great—the bank got money. If the buyer defaulted, the bank could foreclose and, because of the continually rising housing values, then sell the repossessed house for more money than the defaulted mortgage. It was a huge gravy train, every bank wanted to get in on it, and bankers everywhere couldn’t close on enough mortgages fast enough. The banks knew, of course, that a high proportion of these risky subprime mortgages would default, but they didn’t care. All they saw were dollar signs, and they knew that as long as the housing bubble kept swelling, they could always make even more money by repossessing the defaulted mortgages and re-selling the houses.
It wasn’t long, of course, before the investment bankers wanted in on the gravy train too. There was tons of money to be made, and they were legally barred from making any of it by Depression-era regulations which separated mortgage banks from investment banks, and which limited the amount of leveraged assets that a bank could carry.
So the bankers went to the Clinton and Bush administrations, which obligingly passed two deregulations; the Graham-Leach Act repealed the Glass-Steagall Act that had separated investment banks from mortgage banks since the Great Depression, and the Securities and Exchange Commission relaxed the provisions of the “net capital rule”, which set the amount of debt that any bank was allowed to carry. These regulations had been put into place after the Depression to prevent the bank failures, caused by high levels of debt from risky stock market or financial investments, that had caused the 1929 collapse. Their repeal meant that every bank in the country was free to invest freely in subprime mortgage derivatives; the Commodity Futures Modernization Act then deregulated the sale of these derivatives and removed any effective governmental oversight.
Now, every financial corporation in the country was at liberty to make money off the housing bubble. The investment banks began offering things called Mortgage-Backed Securities (MBSs) and Collaterized Debt Obligations (CDOs), which were securities packages, sold worldwide in the global financial market, based on the ever-increasing value of the housing mortgages. Although these were somewhat risky, the financial credit rating agencies obligingly gave them “safe” ratings. Wall Street even made money off the risk, by selling insurance packages called Credit Default Swaps (CDSs) which protected the security if the subprime loans it was based on failed to perform.
The result was a classic bubble, as everyone rushed to invest based on the expectation that housing values would continue to climb steadily. The mortgage banks continued selling mortgages to anyone and everyone, as fast as they possibly could. The investment banks and Wall Street hedge funds continued selling MBSs and CDOs based on those mortgages. They all got rich beyond their wildest dreams.
Of course, deep down inside, some of them must have realized that the housing values simply could not rise forever and that the bubble would inevitably bust, dragging down not only the housing mortgage market, but the entire huge upside-down-pyramid of derivative securities that depended on it. But their attitude was simple—we’ll worry about that later. Today, there’s lots of money to be made.
Inevitably, in September 2008, the bubble did indeed pop. Housing values had declined by over 20%, and people who had borrowed heavily on the value of their house now found themselves unable to keep up. Now, as the default rate climbed to almost ten percent, the banks found that they could no longer sell the repossessed houses for more than the mortgage was worth—indeed, they could now not even sell it for the value of the remaining debt. The defaulted mortgages, and all the derivative securities that had been based on them, were now “toxic” and could not be sold. The payout of Credit Default Swaps to cover them then bankrupted even the largest investment brokers (the total global value of CDSs was estimated at $50 trillion—more than the entire planet’s Gross Domestic Product).
The entire financial house of cards that had been built upon the subprime mortgage industry collapsed utterly. Some financial companies disappeared into bankruptcy; others, famously dubbed “too big to fail” by the government, were saved only by massive bailouts and by government-brokered mergers with other companies.
As the Bush administration left office in January 2009, the global economy had sunk into the worst economic crash in 80 years, and the wars in Afghanistan and Iraq had turned into fiascos. The entire neocon agenda had failed catastrophically, and the American effort to unilaterally overturn the rules-based multilateral global economic structure and give itself a privileged position, had come to an abrupt end.