Responding to the Great Recession: Book Reviews. 2010.
“The easiest way to rob a bank is to own one.” (1)
The current Great Recession was created by finance capital and banking, mostly on Wall Street, ie. Chase Banks, Bank of America, Goldman Sachs, AIG, and others. Finance capital owned the banks, and they robbed the banks through investment and trading schemes including investments in mortgage backed derivatives. Wall Street’s actions plunged the U.S. into the worst financial crisis since the Great Depression, destroying jobs and lives, and triggering a recession in much of the developed world.
The left has failed to adequately explain this crisis allowing the right wing narrative to gain traction. It is vitally important that we understand this crisis, in particular since many economists claim that it is likely to happen again and again.
Although most economists missed the approaching storm, there are now over a dozen good books on this subject published since the crisis. Five books that are particularly helpful are reviewed below.
Paul Krugman.
Paul Krugman, won the Nobel Prize in Economics in 2008 and is well known for his regular columns in the New York Times. He has republished The Return of Depression Economics with an update- the Crisis of 2008. The original version of this book was written in 1999. It has been significantly updated with a focus on the Asian Crisis and now includes an analysis of the current debacle.
Krugman, a Professor at Princeton, argues that the crisis is endemic. It has been growing since the 1990’s. He describes particularly the 1994 Peso Crisis in Mexico , the East Asian Crisis, and the US stock market bubble of 2001/02. He could have well added the Russian Crisis of 1998. In several of these cases the (U.S. dominated) IMF imposed a monetary austerity solution on weaker economies in efforts to contain the crisis. However, in the case of the 2007/2009 Great Recession which started in the U.S., the size of the crisis made it impossible for the IMF to impose a solution and the economic contagion spread around the economies of the West.
The 2007/2009 U.S. crisis was severe in part because of the growth of finance capital to a dominant actor in our economy . Finance was in crisis, not the production of goods and services. Since the 1980’s , in the age of globalization, U.S. finance capital and financial services grew as a percent of the total profits in the economy while manufacturing declined. While the financiers made billions from stock options and bonuses, the average wage of working families remained stagnant, thus they had limited money to use to buy new products. And, when they did buy, the products were often manufactured in China or Vietnam and their production stimulated that economy, not the US economy.
Krugman argues that the current crisis was predictable based upon the prior crises in developing markets, however the ideological rigidity and domination of myths of Free Market Capitalism kept economists, bankers and investors from seeing the approaching storm. They refused to consider that a crisis might spread and disrupt the U.S. and Western industrialized economies.
Krugman argues for a return to Keynesian understanding of this crisis in developing a response to the current loss of jobs and thus loss of demand. That is, the government must stimulate economic recovery by investing in jobs and infrastructure even though the increased globalization of the economy makes a national Keynesian response less effective. In the New York Times Krugman frequently argues that the stimulus of 2008 was too timid to jump start the economy . Since the government has not provided a major economic stimulus, because of Republican opposition in the Senate, we are suffering a sustained crisis as state and local governments cut public services and lay off public workers. Along with the other authors, Krugman warns that unless there is significant public investment and changes in policies and regulations, the crisis will repeat again and again.
Dean Baker
Dean Baker, the co-director of the Center for Economic and Policy Research in Washington, D.C, has been one of the persistent well informed scholars to explain the Great Recession. In Plunder and Blunder: the Rise and Fall of the Bubble Economy, (2009) he explains how the market was de regulated under Clinton and then exploited under Bush leading to the stock market bubble of 2001, the growth of hedge funds, and the sub prime mortgage bubble of 2007. The collapse of the mortgage bubble had been predicted by Baker and others. Goldman-Sachs, for example, gained billions by betting that market would collapse at the same time as they were selling mortgage backed securities to pension funds and less well connected investors. Plunder and Blunder includes a glossary of some of the major finance terms and an index . Readers can keep current on the work of Baker and the Center at their excellent web site; http://www.cepr.net/. Including this on Feb.1,2010.
“The reality is that we got into this mess because of an overwhelming excess of greed and stupidity on the part of the Wall Street bankers and the people deciding economic policy. We continue to face excessive rates of unemployment because of a continuing reluctance to pursue policies that can restore the economy to health.”
Both Baker and Krugman point to the over lapping economic policy developments directed by former Clinton Secretary of the Treasury Robert Rubin along with current Director of the White House National Economic Policy Committee Larry Summers, Ben Bernanke, Chairman of the Federal Reserve, and Timothy Geithner, the current Secretary of the Treasury. They all worked together.
Nomi Prins
Nomi Prins, a former manager at Goldman Sachs wrote the remarkable book, It Takes a Pillage: behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street.(2009). If you want the inside story of how the robbery occurred and how incompetent finance managers are paid millions, then Pins book is for you. She used her insider knowledge and research to follow the money. Pins provides detailed names, dates, and alternatives to give us all an insiders look at how the large criminal conspiracy known as Wall Street pushed the government to bail out the rich and powerful while creating debt for future generations . She claims, with good support ,that some $50 trillion in global wealth was erased between September 2007 and March 2009, including $7 trillion in the U.S. As Prins says, “ Wait ? More than $13 trillion in the bailout? If you thought this bailout was only about the $700 billion thing called the Troubled Assets Relief Program, which is what the banks, the Treasury Department, and the Federal Reserve want you to believe, you really need this book.” P.5.
Why is this enormous amount so critical ? Because it will require at least $7 trillion dollars worth of growth in the U.S. economy for working people to get back to where they were in 2007. For us, the Great Recession – or what Prins calls the Second Great Bank Depression will likely last for many more years. We now experience these economic hard times in loss of jobs, cut backs in states and cities to pensions, schools, roads, and health care. Note, there have not been cut backs in the military .
Joseph Stiglitz
A Nobel Prize winning author Joseph Stiglitz’s excellent book, Free Fall: American, Free Markets, and the Sinking of the World Economy, (2009) in an extensively documented work explains the basics of the U.S. crisis and includes a more global perspective on the economic crisis.
Joseph Stiglitz was the former Chair of the Council of Economic Advisors in the Clinton Administration (1995-1997) where he frequently had conflicts with Larry Summers who was first Under Secretary of the Treasury under Robert Rubin. and then later went on to become the U.S. Secretary of the Treasury . Rubin and Summers played central roles in the deregulation of derivatives – one of the prime causes of the present crisis. Rubin, of course, after leaving the Clinton Administration became first a director and then the Chairman of Citi Group. From 2001 until 2006, Summers was President of Harvard . Summers currently serves as an Chair of the Economic Advisors to President Barack Obama and he has shaped the Administration’s inadequate proposals for regulatory reform.
After leaving the U.S. Administration in 1997 Stiglitz went on to become a Senior Vice President for Development and the Chief Economist of the World Bank and later a Professor at Columbia University. He continues his work with the United Nations, the Socialist International and other international organizations. In 2009, Stiglitz chaired the Commission of Experts on Reforms of the International Monetary and Financial System, informally known as the Stiglitz Commission, "to review the workings of the global financial system, including major bodies such as the World Bank and the IMF. “
Stiglitz, Krugman, Prins and the others authors agree that the current proposals for regulatory reform are too limited. In this book and in public statements, Stiglitz is a major voice for the need to regulate finance capital. Free Fall argues that if we do not re regulate capital the current abuses of Wall Street will continue. Stiglitz particularly argues that we should not have banks that are “too big to fail”. We need some version of the re-imposition of the Glass- Steagal act of 1933 which separated banks from financial investment and trading companies.
Recognizing the U.S. Oligarchy
The recent work 13 Bankers. The Wall Street Takeover and the Next Financial Meltdown. ( 2010) covers similar ground as the prior books and develops the important thesis that the U.S. is being directed and exploited by an oligarchy. This oligarchy protects their profits and their privileges, they dominate the government. And, they will continue to do so until they are stopped.
13 Bankers has particular importance since it was published in Spring 2010 just as the Washington/ Wall Street debate on regulatory reform reached its zenith. Johnson and Kwak argue that in the crisis of 2007/2009, which the oligarchy created, the rich seized billions of dollars for themselves. They made massive profits from the economic disaster. The Great Recession cost the homes, the jobs, and even the lives of working people.
In The Wall Street Takeover and the Next Financial Meldown, Johnson and Kwak describe in detail the self serving economic theories which the wealthy and the powerful promote, such as those advanced most notably by the University of Chicago economists. These theories known at various times as Free Market Capitalism, or the Washington Consensus, or the rational market thesis serve the elite well. Allowing these theories to disguise market manipulation by the large banks is very profitable for the oligarchy.
Johnson and Kwak, like Krugman, trace economic history going back to the founding of the nation and the struggle over the first of our first national banks. Their essays on Jeffersonian and Jacksonian distrust of the banks are insightful. Conflicts over the role of banking lead directly to our present crisis of wealth dominating and manipulating our government.
In 13 Bankers Johnson and Kwak argue that the 1997-1998 crisis in “emerging markets” along with the economic crisis in Russia in the 1996-98 period show precisely how oligarchies drain the resources for their own benefits – a process long recognized by the IMF in responding to crises in the “developing world” but, it was argued, it could never happen in the “democratic , capitalist USA”. – but it did.
The authors note,
“ In the dark days of late 2008- when Lehman Brothers vanished, Merrill Lynch was acquired, AIG was taken over by the government, Washington Mutual and Wachovia collapsed, Goldman Sachs and Morgan Stanley fled for safety morphing into bank holding companies, and Citigroup and Bank of America teetered on the edge of being bailed out- the conventional wisdom was that the financial crisis spelled the end of an era of excessive risk –taking and fabulous profits. Instead, we can now see that the largest, most powerful banks came out of the crisis even larger and more powerful. When Wall Street was on its knees, Washington came to its rescue- not because of personal favors to a handful of powerful bankers, but because of a belief in a certain kind of financial sector so strong that not even the ugly revelations of the financial crisis could uproot it.” ( P.11)
The current “rescue” of the banking system was organized by Hank Paulson, Secretary of the Treasury under George Bush and formerly a Chairman of Goldman Sachs, and by Larry Summers, Timothy Geithner and others who learned their financial perspectives working with Robert Rubin in the Clinton Administration. Johnson and Kwak are at their best in providing a description of how Wall Street used its growing economic power to gain political power including having ex executives of Goldman Sachs working in the current administration.
They argue that if we hope to defend our society and to regain democracy, the large financial corporations, the oligarchy, must be stopped and broken up- just as Standard Oil, the railroad monopolies and AT& T were broken up in their time. They assert that several of the major financial corporations are just too big to exist- they should be broken up. They propose ending “too big to fail” by making all banks and financial corporations small enough to fail without destroying the economy. In addition Johnson and Kwak offer a detailed analysis of how and why breaking up the largest banks ( they list 6 still standing), would improve our economic efficiency not compromise our growth. Unless we reduce their footprint on the economy, we will lose our democracy- as demonstrated in the current economic crisis. Readers can follow The authors of 13 Bankers consider the twists and turns of regulatory proposals in Congress regularly on their web site The Baseline Scenario: http://baselinescenario.com/.
Taking our message to the streets.
The Administration and the Senate proposals for regulatory finance reform are too limited. As in the health care debate, the Administration begins in the modest center and then compromises to the right.
The banks, their public relations departments, and over 1,400 lobbyists are trying to convince us that CDO’s, credit default swaps, and the other mechanisms of this fraud are too complex for us to understand. Although the processes used to create the mortgage backed derivatives was obscure- and deliberately so- the fundamental economic processes at work are understandable.
As Johnson and Kwak point out, banking and finance “experts’ and media relations teams are deployed to advance the self serving interests of the oligarchy. We, on the other hand, have scholars and even Nobel Prize winners including those reviewed above who assist us to de-mystify the economics and to reveal the political/economic agenda behind these schemes. Unfortunately, the Left has yet to explain the robbery in terms everyday working people can understand.
An April 18 poll by Pew Research, “The People and Their government: Distrust, Discontent, Anger and Partisan Anger”, revealed a high level of distrust of the government by ordinary citizens.
The Left should recognize that distrust of the government is legitimate because on in the banking crisis and on economic issues the government did bail out the oligarchy. While we separate ourselves from those who would respond to the distrust, discontent, and anger with domestic terrorism- such as the militia movements- the anger among working people is legitimate. However, when the anger is only focused on the government, and not also at Wall Street and corporate America, then clearly the group has been misled. If the anger targets racial and ethnic group, or at immigrants, then they do not understand global economics nor solidarity- and quite likely they are being used. Our task is to develop an effective anger and resistance from the left.
The Tea Party activists and their Republican funders promote conflicts over issues of immigration, teachers’ unions, public workers pensions, and big government as substitutes for the critical analysis of economic problems. These false choices work, they mobilize, because they seem to offer an explanation – albeit a false one- to the very real economic pain of working people and the unemployed. Our task is to point out that the U.S. and eventually world wide financial crisis was caused by the greed and the theft of a few very rich operatives. The oligarchy caused the crisis, the unemployment ( not immigrants), the economic losses, the off shoring of production jobs, the cuts in services to the poor, to families, and to the unemployed.
What are the policy alternatives?
As Johnson and Kwak argue in 13 Bankers, we must break up the largest 6 banks in the nation and pass legislation preventing them from re-establishing control or we will lose our democracy. There will be no need for future bank bailouts when we prevent banks from becoming too big to fail. In the Senate, the Brown-Kaufman Safe Banking bill and the Merkly-Levin bill that would have moved toward a limit on bankers power were blocked by Republican threats to filibuster. They were not allowed to come to a vote. The conference committee bill has some good provisions, but it doesn't end "too big to fail" banks and it doesn't create a Glass-Steagall style firewall between commercial and investment banking. This is the best we can hope for given the rules of the Senate and the fierce obstructionism of the Republican Party.
Wall Street should not be allowed to rule and to ruin our country again as they did in 2007-2009. To achieve finance reform we need to return some democracy to our political system. It is out of balance. For the last thirty years we have witnessed class war in our economy and the rich have won. The banking crisis and the current economic crisis demonstrate that the structure of our economic system is failing. To become an opposition the Left has to make the case for economic policies that serve the interests of working people – such as extended unemployment benefits, jobs, new investments in schools, teachers, and health care. That is, we must oppose the agenda of the oligarchy and the bankers in both major political parties.
We are in the greatest economic crisis since the 1930’s. The Left must respond. WE need a new consistent, comprehensible narrative to explain how the economic system is only working for the rich and powerful, not for working people. Such a narrative would explain to working families the economic reality and the destruction which they are seeing around them and provide an alternative to the narrative being offered by the media, the Tea Party and the other corporate front groups. And, the left narrative must be connected to a strategy for change. We can join in this task with Richard Trumka of the AFL-CIO and other segments of the labor movement in the effort to Make Wall Street Pay and to take back our government. WE can use the slogan they have popularized – take back our government -and turn the slogan into a positive. It is really us v. them. But, it is not Black v. White v. Latino. It is the rich v. working families. Yes, we can take back our government if we decide that it is our country and our government and we won’t let them steal it – again.
Duane E. Campbell
(1) title derived from the excellent book about the prior recession. The Best Way to Rob a Bank is to Own One. (2005) By William K. Black.
An edited version of this article was published in Democratic Left. The magazine of Democratic Socialists of America. Summer. 2010. The issue will soon be online at http://www.dsausa.org/dl/Summer_2010_content/DL_Great%20Recession%20Books.pdf. Thanks to Jeff Gold for editorial assistance.