Is the 'Good Life' as America Knows It Over?

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Sep 19, 2008, 11:55:18 PM9/19/08

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Is the 'Good Life' as America Knows It Over?
By Steve Fraser, Tomdispatch.com. Posted September 19, 2008.

The relationship between Washington and Wall Street has changed
fundamentally, and as a result, the road ahead is dark and unknown.

Introduction by Tom Engelhardt: Among the many media spectacles of the
moment, the most unnerving is undoubtedly the crisis on Wall Street
that has already essentially toppled Bear Stearns, Lehman Brothers,
Fannie Mae and Freddie Mac, Merrill Lynch, and -- probably not last
and certainly not least -- the gigantic insurance company AIG, which
has just been given $85 billion in taxpayer moneys to liquidate
itself. Before we're done, that hoary old oxymoron of the Left, "late
capitalism," may gain new life.

Elsewhere on the planet, it turns out, it was more obvious that the
U.S. was in crisis. One small sign of the changing state of the
globe's "sole superpower" is that, even before banking institutions
started to tumble off walls like so many Humpty Dumpties, the
International Monetary Fund, that dominatrix of global capital, was
planning to pay Washington a working visit. This is the sort of thing
you expect, with great trepidation, if you're Haiti, or Pakistan, or
Malawi, or Argentina on the brink of financial meltdown -- but the
United States? Nonetheless, according to NPR's David Kestenbaum, "The
U.S. Treasury says America has now agreed to get a stability
assessment from the IMF. The announcement didn't get much attention,
but officials at the IMF expect to start examining U.S. finances in
the next couple [of] months."

Welcome to the Third World, America. Now, hold your hats while the
whirlwind blows and the stock market goes into heart-attack mode.
Steve Fraser, an expert on Gilded Ages (and how they end), as well as
the author of a superb new book on our financial "masters of the
universe" from the eighteenth century to the present, Wall Street:
America's Dream Palace, brought up the dreaded "D" word (for
depression) this April at TomDispatch when, in the mainstream, pundits
were still wondering whether we might possibly, actually, really be
edging toward, or near, a recession. He wrote at the time: "The
current breakdown of the financial system is portentous. It threatens
a general economic implosion more serious than anyone has witnessed
for many decades.

Depression, if that is what it turns out to be, together with the
agonies of a misbegotten and lost war no one believes in any longer,
could undermine whatever is left of the threadbare credibility of our
Gilded Age elite." Now he's being quoted on the front page of the New
York Times. How times (of every sort) have changed in just the space
of a few months... Drawing on his knowledge of the history of Wall
Street and Washington, now let him offer you now a little perspective
for the months to come. -- Tom Engelhardt

What is Washington to do as the financial system collapses? Clearly,
stark differences in approach as well as in public policy have already
emerged. Bail-out Bear Stearns and pump up the brokerage and
investment business with new lines of credit. Nationalize Fannie Mae
and Freddie Mac on the backs of the taxpayer -- but let Lehman drown.
Tell the financial community to save itself, after which Bank of
America salutes and buys Merrill Lynch. Then, the Fed gets cold feet
and decides it can't let an institution the size of the insurance
giant AIG go under as well. Washington is left staring into the abyss.
The old rules no longer apply.

And that's the point. At moments of crisis since the mid-1980s, the
relationship between Washington and Wall Street has changed
fundamentally, at least when compared to anything that would have been
recognizable in the previous century. As a result, the road ahead is
dark and unknown.

During the nineteenth century, Washington was generally happy to do
favors for Wall Street financiers. Railroad tycoons, who often used
those railroads as vehicles of extravagant speculation, enjoyed
subsidies, tax exemptions, loans, and a whole smorgasbord of financial
fringe benefits supplied by pliable Congressmen and Senators (not to
mention armadas of state and local officials).

Since the political establishment was committed to laissez-faire,
legerdemain by greedy bankers was immune from public scrutiny, which
was also useful (for them). But when panic struck, the mighty, as well
as the meek, went down with the ship. Washington felt no obligation to
rush to the rescue of the reckless. The bracing, if merciless,
discipline of the free market did its work and there was blood on the
floor.

By early in the twentieth century, however, the savage anarchy of the
financial marketplace had been at least partially domesticated under
the reign of the greatest financier of them all, J.P. Morgan. Ever
since the panic of 1907, the legend of Morgan's heroics in
single-handedly stopping a meltdown that threatened to become
worldwide, the iron discipline he imposed on more timorous bankers,
has been told and re-told each time an analogous implosion looms.

Indeed, last week's news carried its fair share of 1907-Morgan
stories, trailing in their wake an implicit wistfulness. They all
asked, in effect: Where is the old boy when we need him?

Back then, with Morgan performing his role as the nation's unofficial
private central banker, Teddy Roosevelt's administration continued to
keep its distance from Wall Street, still unready to offer salvation
to desperate financial oligarchs. Not normally chummy with Morgan and
his crowd, Roosevelt did cheer from the sidelines as the über-banker
performed his rescue operation.

As it turned out, though, the days of Washington agnosticism about
Wall Street were numbered. The economy had become too complex and
delicate a mechanism and, in 1907, had come far too close to meltdown
-- even Morgan's efforts couldn't prevent several years of recession
-- to leave financial matters entirely in the hands of the private
sector.

First came the Federal Reserve. It was established in 1913 under
President Woodrow Wilson as a quasi-public authority meant to regulate
the country's credit markets -- albeit one heavily influenced by the
viewpoints and interests of the country's principal bankers. That
worked well enough until the Great Crash of 1929 and the Great
Depression that followed and lasted until World War II. The depth of
the country's trauma in those long years vastly expanded the scope of
Washington's involvement in the financial marketplace.

President Franklin D. Roosevelt's New Deal did, as a start, engage in
some bail-out operations. The Reconstruction Finance Corporation,
actually created by President Herbert Hoover, continued to rescue
major railroads and other key businesses, while some of the New Deal's
efforts to help homeowners also rewarded real estate interests. The
main emphasis, however, now switched to regulation. The Glass-Steagall
Banking Act, the two laws of 1933 and 1934 regulating the stock
exchange, the creation of the Securities and Exchange Commission, and
other similar measures subjected the financial sector to fairly
rigorous public supervision.

This lasted for at least two political generations. Wall Street, after
all, had been convicted in the court of public opinion of reckless,
incompetent, self-interested, even felonious behavior with
consequences so devastating for the rest of the country that
government was licensed to make sure it didn't happen again.

The undoing of that New Deal regulatory regime, and its replacement,
largely under Republican administrations (although Glass-Steagall was
repealed on Clinton's watch), with what some have called the
"socialization of risk" has contributed in a major way to the mess
we're in today. Beginning most emphatically with the massive bail-out
of the savings and loan industry in the late 1980s, Washington
committed itself, at least under conditions of acute crisis, to
off-loading the risks taken by major financial institutions, no matter
how irrationally speculative and wasteful, onto the backs of the
American taxpaying public.

Despite free market/anti-big-government rhetoric, real-life Washington
has tacitly acknowledged the degree to which our national economy has
become dependent on the financial sector (Finance, Insurance, and Real
Estate -- or FIRE). It will do whatever it takes to keep it afloat.

This applies not only to particular institutions like Bear Stearns, or
even to mortgage mega-firms like Fannie and Freddie, but to finance in
general. When it seemed necessary, public monies were indeed funneled
in the general direction of the banking/brokerage community to shore
up the whole rickety structure. This allowed one burst bubble -- the
dot-com debacle -- to be replaced by another, namely our late,
lamented mortgage/collaterized-debt-obligation bonanza, just now
dramatically going down the tubes.

Backstopping the present bail-out is the ever-credulous, put-upon
American public with its presumably inexhaustible resources. Even
while Washington was instituting the periodic "socialization" of bad
debts, it was systematically abandoning the New Deal's commitment to
regulation. That, of course, was in the very period when financial
markets became ever more arcane, ever less comprehensible even to
their Frankenstein-ian inventors, and ever more in need of monitoring.
So the "socialization of risk" was accompanied by the "privatization
of reward," which now is likely to prove a truly deadly combination.

That the crisis has now reached a newly terrifying stage is suggested
by Washington's sudden willingness to depart from the new orthodoxy
and let the huge investment bank, Lehman Brothers, go under. Some may
see in this a steely return to a laissez-faire faith. More likely, it
represents wholesale confusion on the part of Bush administration and
Federal Reserve policymakers about what to do, even as all endangered
businesses have come to take it for granted that Washington will toss
them a life-preserver when they need it.

The times call for a new departure. The next administration, which
will surely enter office under the greatest economic pressure in
memory, must confront reality. The financial system is out of control
and has led the economy into a wildly turbulent sea of heavily
leveraged speculation.

It's time for a reversal of course. Stringent re-regulation of FIRE is
not enough anymore. Washington's mission may, at this late date, be an
even greater one than Roosevelt's New Deal faced. The government must
figure out how to deploy its power to shift the flow of investment
capital out of the mine-fields of speculative paper transactions and
back into productive channels that will help meet the material needs
of American society. Real value must be created in place of chimeras.
In the meantime, we all have ringside seats -- in fact, far too close
to the action for comfort -- as another gilded age is ending. What
comes after is, in part, up to us.

--end of article

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