For all the talk of Wall Street reform and consumer protections the problem of predatory lending has not been eliminated.
Subprime lending continues in the auto financing industry and elsewhere, and unlike conservatives’ criticism of the housing market there are no federal subsidies to finger. Policymakers have, indeed, caused the problem but for reasons other than what many of us have been led to believe. True, Freddie and Fannie Mae advocated for the dream of home ownership even as it floated out of Americans’ reach. However, this reality only begs the obvious but lesser asked question: Why is the American Dream drifting out of reach in the first place? And might the answer to this question reveal that the hollowing-out of the middle class bears a reciprocal relationship to market volatility?
Like so many things, the makings for crisis have not been quite as partisan or straightforward as mainstream media pundits, among others, have made it out to be. Take the Financial Modernization Act of 1999. The legislation to undo among the last of the Depression-era separations between commercial and speculative banking was spearheaded by a Republican, Sen. Phil Gramm, and signed into law by a Democrat (President Clinton). Both the Right and the Left have been complicit in the sin of short-sighted gains at the expense of long-term sustainable growth. And yet, for all the harm the nation has suffered, many policymakers are unwilling to soften their deregulatory dogma.
For conservatives, in particular, a core free-market assumption holds that participants are inherently rational when they pursue self-interest. The mid-Century writer and philosopher Ayn Rand posited that when individuals pursue ego-driven self interest it benefits others, too. Objectivism and its outgrowth, rational choice theory, attracted fierce devotees including former Fed Chairman Alan Greenspan.
Decades would pass before Greenspan acknowledged the “euphoric bubble“— the group-think of irrational exuberance — that erupted with the subprime mortgage securitization frenzy from 2003 through 2007. Still, Greenspan’s devotion to Randian ideals remains unshaken.
Do we have Rand to thank for our proclivity for great, grand global delusion?
What is appreciated far too little, nearly four years into this lingering economic malaise, is the rationalism of loss. The process of placing side bets on underlying assets is referred to as the financial derivatives market. As depicted in “House of Cards“, Wall Street has figured out how to profit when we’re on the upswing and to benefit when we’re on the downswing. When it is possible to “win by losing” the incentive for straight-up commerce declines. Consequently, ours is the era of the “Bubble-Based Economy”. And it explains a lot about our uncertain economic and employment outlook.
In a pessimistic climate businesses don’t want to expand. Consumers don’t want to spend. Volatility spooks investors. And the self-perpetuating slide contributes to lesser demand, greater unemployment and protracted austerity.
The real economy consists of productive and tangible goods and services. The speculative (shadow) market consists of a bet a trader places on whether commodities and assets will prosper or fail. Over the past 30 years we have gradually inverted the market. According to a piece on “Seeking Alpha”, there are more paper-based IOUs in the Wall Street casino than the entirety of Main Street — and, indeed, all the sovereign wealth in the world — can make good on. This inside-out-upside-down international economy began not only because it was legal to engage in casino gambling but because it is increasingly attractive to do so in the face of economic atrophy — that is, an eroding middle class.
When traders have a competing incentive to speculate on failure, a “bipolar duality” emerges between forces that benefit when the economy is built up and forces that gain from tearing it down. It is rational to gain. It is rational to lose. The so-called moral hazard depends on where you sit. In fact, market relativism may be a prime yet largely unheralded reason why prominent economists disagree on the cause of the crisis.
All market activity transfers wealth. The question we have to ask ourselves is whether or not we want to siphon wealth out of the productive class and into the speculative class. Because that’s exactly what we’ve been doing to the mind-blowing tune of quadtrillions of dollars worldwide.
Restoring a robust middle class has nothing whatsoever to do with the socialist aim of taking from the wealthy to redistribute gains to the less fortunate. Rebuilding Main Street is about counteracting the next bubble before it blows. It’s about putting an entire generation of young war veterans and college grads on the path to prosperous productivity through better and more numerous jobs.
Ours is a time to return to market fundamentals — the three “Rs” of a real economy: Rational Reinvestment. Reasonable Regulation. Realistic Rewards.
Essentially, we need a 12-step program to recover from “speculation addiction” and its economic enablers who made reckless risks not only possible but deceptively attractive. We need a worldwide intervention in which we come to terms with the fact that the credit crisis is but a symptom, not the underlying disease process. The disorder is inequitable trade agreements and the middle-income earners that egregious economic policy and careless commerce elbows out of the productive class to the peril of all who remain. The economic pathology is the proliferation of highly concentrated, specialized markets in which the West consumes and the East produces; small businesses’ lack for capital and competitive entry into increasingly monolithic markets; big businesses that cannot be permitted to fail and, increasingly, advances in technology that we have uncritically embraced.
Capitalism must recapitalize — not merely liquidity and credit but values, virtue and opportunity.
If we want to improve the employment outlook and lower the odds of one boom-and-bust cycle after another in today’s hyper-connected small world, we have no choice but to outlaw off-the-books trading in securitized debt, reign in the institutional speculator and to regulate over-the-counter financial derivatives on the whole.
A healthy free market is based on the diversification and dispersion of real enterprise.
The “job creators” — the haves and the have-nots — should not be defined on the bets they won but by their creative and concrete contributions to society. The only cap on trade should be the casino variety. The only free market we ought to uphold is the Real Market — not its derivatives’ doppelganger.