(Masters of Economic and Financial Disaster), with the help of a three-trillion-dollar, taxpayer funded bailout, continue to weave a calamitous financial and economic web for the nation. The MEFD include the "Masters of the Universe" as well the wannabes.
And, the American politicos repeatedly give these MEFD the benefit of doubt; and possibly in violation of the law according to William Black; speaking on PBS' Bill Moyers Journal and today on Bloomberg TV (see Editors' Video Picks) they disburse trillions of taxpayer dollars to support these purveyors of toxic financial instruments.
Follow me over the jump for a look at several principal economic, financial and political elements (not an all inclusive list) that aided and abetted the Masters of Economic and Financial Disaster in the production of today’s economic calamity.
The foremost element that contributed to our present economic/financial disaster has to be the thwarting of financial regulation. Before the era of financial deregulation, critical regulatory agencies, such as the Securities and Exchange Commission, Federal Deposit Insurance Corporation, Office of Thrift Supervision, Federal Reserve Bank and state insurance commissions, once insured that financial institutions (e.g., commercial banks, investment banks, mortgage brokers, insurance companies, etc) could not operate in a laissez faire, casino style environment.
All this deregulation facilitated the creation of the phenomenon that Paul Krugman described as "making banking exciting"; a banking occurrence that led to a national debt level comparable to the quantity of debt that was reached just prior to the 1929 Stock Market Crash and the Great Depression.
Krugman on "banking becoming exciting again":
After 1980, however, as the political winds shifted, many of the regulations on banks were lifted — and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits. Paul Krugman
The establishment and proliferation of nominally regulated, defined contribution retirement plans (e.g., 401k, 403b, etc.) and the decline of defined distribution plans (i.e., known retirement benefits) further enabled the creation of casino investments. Americans were made to believe that they could successfully invest their money in an asymmetrical-information investment world. Consequently, the MEFD could take advantage of the general and mostly unsophisticated public investor – high investment management fees and poor financial advice seemed to have been the norm.
A third ace in our economic and financial house of cards was the development of unregulated structured and asset backed investment vehicles and derivative financial instruments where "liar" loans were securitized, given a "AAA" investment rating and sold to unwitting and in some cases "sophisticated" investors. Of course, the tooth fairy market forces would prevent fraudulent and corrupt activities by unregulated market makers.
Excerpt from a 2007 story on structured investment vehicles and asset backed securities:
Several of the world’s biggest banks are in talks to put up about $75 billion in a backup fund that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that threatens the broader economy.
Citigroup (C), Bank of America(BAC) and JPMorgan Chase (JPM), along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles. The meetings, which began three weeks ago, have been orchestrated by senior officials at the Treasury Department, and the discussions have intensified in the last few days. Story is based on New York Times reporting according to Mish's Global Economic Trend Analysis.
The penultimate element of the present economic fiasco is the stagnant wages of middle and working class Americans. The economic policies that brought us to our current, near ruinous economic situation also gave us the great income disparity that now exists in the United States. The large and unfair income disparity is further amplified by another feature that contributed to our current economic disaster.
Here is Economist and Former Labor Secretary Robert Reich on stagnant wages (courtesy of The Miami Herald):
Reich said reduced consumer spending is a symptom of a broader problem: The relative stagnation of middle-class wages. Globalization and technological advances have destroyed a host of jobs, from gas-station attendants to bank tellers, Reich said. But the jobs that have seen growth don't pay so well.
``What all this means is median wages have not increased very much, adjusting for inflation, for many decades.''
In part to make up for this, more women entered the workforce. Then everyone started working longer hours. Then people increased borrowing.
Robert Reich
The last component of today’s economic maelstrom addressed by this diary is a tax code that encourages and rewards financial legerdemain instead of promoting and rewarding productive economic activities. Teachers, manufacturing workers, service providers, et al who have incomes in the mere five-digit range are taxed at rates higher than the hedge fund manager who makes millions of dollars of income – a truly fair and balanced tax system.
Passage from 2007 Economic Policy Institute article on tax break for Hedge Fund managers:
This policy memo focuses on this special tax break, explaining why it is not economically sound and offering reasonable estimates of what it costs the U.S. Treasury and ultimately other tax payers in terms of lost tax revenue.
Tax treatment distorts economic incentives
There are two things economically wrong with this special tax provision for hedge fund managers. First is its impact on economic efficiency. It creates inconsistent economic incentives (i.e., distortions) for some labor income to be treated as ordinary income while other labor income is treated as capital gains, and the work done by investment advisors is undeniably a professional, laboring activity.1 Fund managers at pension funds, trusts, and endowments who provide similar professional services are paid a salary and possibly a bonus, and these are all treated as ordinary income. Only because hedge funds and private equity firms are organized as limited liability partnerships—which are already treated favorably for tax and liability purposes—are these same professional services taxed differently. The result is a distortion in the compensation and after-tax income between these super rich hedge fund managers and millions of others in the workforce.
The second thing wrong with this exemption is that these super rich fund managers do not need and certainly do not deserve special tax breaks. Alpha Magazine reports the compensation for hedge fund managers each year. The top earner for 2006 received $1.7 billion, the second highest received $1.4 billion, and the third $1.3 billion. That adds to $4.4 billion for three people. The top 25 hedge managers received, on average, $570 million for a total of $14.25 billion. Randall Dodd, Economic Policy Institute.
It seems that, until we address the aforementioned economic and financial elements (and many others) in a progressive and economically fair manner, we will continue to experience the vagaries of an asymmetrical financial system that benefits mainly a few wealthy elites.
President Franklin Delano Roosevelt, his advisers and the New Deal Congresses understood well the need to re-balance America’s economic system – to make it more rewarding to the productive economy than the imbalanced, Wall Street-oriented economy. Hopefully, President Barack Hussein Obama and the present Congress will take progressive economic action that is fitting to our time, but similar in ideal to that taken by President Franklin Delano Roosevelt.