Just a few months ago the global marketplace was being applauded as a place of great liquidity (which is what matters, not great value or distribution just lots of cash) and the regulatory environment and everything else about the legal framework seemed to be near optimal for market-oriented, private-profit driven enterprises. Then along came the sub prime scare, which has apparently affected investor sentiment and the markets have taken a plunge. Is this a chink in the armor of "tough love" capitalism (character-building market discipline for the poor and middle class--social welfare for the rich), where the focus on supply-side indicators has left stagnant demand that finally caught up with profit making? The suffering of the less privileged parts of the population, namely African-American homeowners in subtext, now requires a market correction. Does this expose a flaw in the neoliberal policies, those policies which are based on creating a tax/subsidy system which provides a welfare state for the rich and imposes the cost upon the poor?
Over the past few decades, while real wages and sales
have been stagnant, lots of wealth has been created
through subsidies and then expanded through
speculation; because that is how the financial
markets work. Making money on derivative security
schemes is great, but the party can’t last forever.
Just a few months ago the global marketplace was
being applauded as a place of great liquidity (which
is what matters, not great value or distribution just
lots of cash) and the regulatory environment and
everything else about the legal framework seemed to
be near optimal for market-oriented, private-profit
driven enterprises.
Then along came the sub prime scare, which has
apparently affected investor sentiment and the
markets have taken a plunge. Is this a chink in the
armor of "tough love" capitalism (character-building
market discipline for the poor and middle
class--social welfare for the rich), where the focus
on supply-side indicators has left stagnant demand
that finally caught up with profit making? The
suffering of the less privileged parts of the
population, namely African-American homeowners in
subtext, now requires a market correction. Does this
expose a flaw in the neoliberal policies, those
policies which are
based on creating a tax/subsidy system which provides
a welfare state for the rich and imposes the cost
upon the poor?
Part of the problem with the current economy is that
sales figures have been stagnant for decades.
Typically when poor sales figures are expected it is
called a weak consumer outlook, as if it were the
fault of the consumer ("You stupid peasants, buy more
stuff"). Recently when weak sales outlooks are
forecasted the press, even the left, usually engage
in a bit of wishful thinking and forecast Fed funds
rate cuts ("Weak sales could nudge Fed to rate cut:
Retailers rely on heavy discounting;" Robert Weisman;
Boson Globe; September 15, 2007).What all of this
really means is that there is weak demand.
A large contributor to weak demand is stagnant
income. The economic growth that has been occurring
for the past thirty years has been redistributed
upward and as far as I know that is an
uncontroversial statement amongst economists
("Economy Goes From Bad to Worse"; Dean Baker; 06
August 2007). One of the reasons that the
redistributive effect has occurred is because of the
regressivity of the tax system. Demand could be
stimulated by making the tax system more progressive.
But that is just inconceivable. We’re here to help
the rich, not the poor.
So, market based solutions are suggested. A plethora
of market based solutions are usually put on parade
for every financial crisis. They typically involve
privatizing everything in site, making the tax system
even more regressive, and giving further subsidies to
the quasi-private sector.
For the purposes of the latter: enter the reduction
in Fannie Mae portfolio caps (Read: the use of more
public funds to buy private goods). Fannie Mae is a
holdover from those glory days of demand-side
"Keynesian" economics when there was a nanny state
for more than just wealthy private industries. Of
course, Fannie Mae does help support private
industries with subsidies to some degree, which is
probably the reason it is still around.
To be fair, in 1968 Fannie Mae was re-funded with
private capital investments
( http://www.fanniemae.com/... ). But
Fannie is used to buffer private sector financial
institutions which operate essentially as
profit-grabbing middle men.
Ensuring credit quality by financing security
derivatives schemes is part of Fannie’s mission
essential tasks. But financing profit through
speculation and shell games can only last as long as
consumers manage to eek by just well enough to
actually buy the underlying product.
Plus, the junk bonds scare further exacerbated the
subprime meltdown, spreading the rates of return
between high-yield corporate debt and US treasuries
even further ("Very Scary Things"; Paul Krugman; The
New York Times; 10 August 2007). Why, oh why did some
many poor investors by so many junk bonds? Now,
Fannie and the "Masters of the Universe" need help.
Chuck Schumer wants the "government sponsored
enterprises (GSEs)" to help borrowers in prime
markets, which is not where the problems are ("Sec.
Paulson Calls for Reform of Fannie Mae, Freddie Mac;"
http://thehill.com/... ).
It is a nice idea to have public funds actually used
for somewhat public purposes, but this is just a
measure to protect the upper-middle class and keep
them safe from toxic subprime spillover.
While the liberals in the Senate have concocted a
solution that seems bad, leave it to the Bush
administration to come up with one that is even
worse. Treasury secretary Paulson actually wanted
GSEs to take on more risk. In a global economy where
there are unprecedented levels of risk, an
environment which fostered the subprime meltdown,
Paulson wants financials to take on more risk.
The credit and subprime crises may be correlated, but
determining original causality is beyond the scope of
the present article. Such an analysis may deteriorate
into little more than a "chicken or the egg" matter,
anyway. What is for certain, though, is that the
chickens of reckless, risky financial speculation and
odious income inequality have finally come home to
roost, on Wall Street and on K Street.