Michael Greenberger, former Director of Trading and Markets at the Commodity Futures Trading Commission (CFTC), was interviewed by NPR’s Terry Gross this past Thursday, April 3.
When people tell you this is the worst economic crisis since World War Two, that’s a way of not saying the panicky thing, which is, we may be heading for a depression.
You really, really, really, really need to listen to this interview, and get other people to listen to it, also. It is almost 40 minutes long, but worth every info-packed, thought-provoking second.
Greenberger explained that the sub-prime mortgage crisis was caused by financial derivatives, and that there are more crises coming, because there are many more financial derivatives out there. He notes that the one act of deregulation most to blame – even more to blame than the 1999 repeal of the Glass-Steagal Act (the law passed in the First Great Depression to separate commercial banking from investment banking)- is the Commodities Futures Modernization Act of 2000, introduced on the sly by then Senator Phil Gramm (R-TX), who is now the top economic advisor to John McCain:
it was a 262 page bill, and it was added as a rider to an 11,000 page omnibus appropriation bill as Congress was recessing for Christmas in 2000. I would say there was no one except the drafters of the bill who understood what the legislation did, and I can assure you that the drafters of the bill were not members of Congress. They were the lawyers for the investment bankers on Wall Street.
Greenberger notes that there is now more money invested in these unregulated financial derivatives than in stocks and bonds. (In my opinion, this is the root of everything that ails the U.S. economy, from the growing gap between rich and poor, to the bane of "free trade", to the lack of investment in public infrastructure and a new, green economy.) He explains that the financial system today is focused not on actual investment in the economy, but on booking bets, just like a Las vegas bookie. He and interviewer Terry Gross use a sports team analogy: with stocks and bonds, you are actually putting money into the team. But with derivatives, instead of investing in the team, you're just betting on whether the team is going to win or lose.
Moreover, Phil Gramm’s Commodities Futures Modernization Act of 2000 prohibited the federal and state governments from regulating financial derivatives, so nobody really knows how big the problem is. That’s why
We don’t know if Bear Stearns is the mine disaster, or the canary in the mine warning us of a much bigger disaster.
Greenberger warns that the securitization Wall Street applied to sub-prime mortgages to allow these bets to be placed was also applied to all other types of debt. "We are soon going to find out that it’s not just mortgages, but it’s all kind of loans: credit card loans, auto loans, student loans, are all going" to become problems in the very near future.
Greenberger has a beautiful implicit condemnation of the role Bush has failed to play:
It all goes back to these credit default swaps. The American people don’t understand that. If Franklin Delano Roosevelt were President right now, we would understand that: there would be a fireside chat; we would make it so that the American public understand it. And it’s important that the American public understand it, because even as we speak, the Wall Street interests, who have all the money in the world to hire lobbyists, the lobbyists are lobbying 24 hours a day, seven days a week, 365 days a year ... to keep this market, a shadow market, that nobody understands.
Greenberger notes that Treasury Secretary Paulson's plan, unveiled last week, is actually the result of a review of U.S. financial regulation that began in months before the financial crises erupted, in response to Wall Street crying that it was being too heavily regulated and as a result was losing business to London. Greenberger then judos the whole competition argument by noting that the less regulated British financial system is in even worse trouble than the U.S. system, with the British government having been forced to buy Northern Rock, which suffered a classic Depression-era bank run. The Paulson proposals are modeled on the British, lighter, regulation. The ironic development we see with the present financial crises, is that the less regulation you have, the more state ownership you end up with.
So, Greenberger says,
I don’t think there is any effective proposal on the table. First of all, Phil Gramm’s surprise legislation that prevented regulation of derivatives is far more important than the repeal of Glass-Steagal. . . . [We] need to eliminate the ability of banks and all other lenders not to worry that the loan they are making will be paid back or not. Derivatives have removed financial discipline from the market.
(This is the same point made by Ian Walsh on The Agonist a few weeks ago, Why Financial Crises Will Keep Happening.)
Greenberger explains why the Paulson plan is actually less regulation, not more: because it gives all the responsibility for oversight to the Fed, but does not give the Fed the power to prevent problems from developing. It only gives the Fed power to deal with problems as they occur. And it takes regulatory powers away from the states, which is why the state attorneys general and state insurance commissioners were very upset and came out in opposition very quickly.
At the end of the interview, Greenberger asks what I think is the fundamental question about the whole financial system. It is the question that defines the fault line along which the progressive movement is likely to fracture in the next few years.
Should we have an economy that’s based on whether people make good or bad bets? Or should we have an economy where people build companies, create manufacturing, do inventions, advance the American society, make it more productive? This economy is based on people sitting at their computers and making bets all day long. They call it credit default swaps, OTC derivatives, asset backed securities, etc. etc, - makes it all very complicated, but we are rewarding people for sitting at their computers and punching in bets. That’s not the way our economy is going to be built, and India and China, with their focus on science and industry and building real businesses, are going to eat our lunch, unless the American public wakes up and puts an end to an economy that praises and makes heroes out of speculators.