Angry America and the Bailout
Speculators and Con Men
Under normal circumstances, most Americans have been perfectly willing to draw a relatively sharp distinction between the misguided speculator and the confidence man's outright felonious behavior. One is a legitimate banker gone astray, the other an outlaw.
Under the extraordinary circumstances of terminal systemic breakdown, that distinction grows ever hazier. That was certainly true in the early years of the first Great Depression, when a damaging question arose: just exactly what was the difference between the behavior of Charles Mitchell, Jack Morgan and Richard Whitney, lions of that era's Establishment, and outliers like "Sell-em" Ben Smith; Ivar Kreuger, "the match king"; Jesse Livermore, "the man with the evil eye"; William Crappo Durant, maestro of investment pool stock-kiting; or the onetime Broadway ticket agent and stock manipulator Michael Meehan--men long barred from the walnut-paneled inner sanctums of white-shoe Wall Street?
Admittedly, their daredevil escapades had often left them on the wrong side of the law and they would end their days in jail, as suicides or in penury and disgrace. Nonetheless, as is true today, many Americans then came to accept that between the speculating banker and the confidence man lay a distinction without a meaningful difference. After all, by the early 1930s, the whole American financial system seemed like nothing but a confidence game deserving of the deepest ignominy.
In that sense, Bernie Madoff, a former chairman of the NASDAQ stock exchange, already seems like a synecdoche for a whole way of life. Technically speaking, he ran a Ponzi scheme out of his brokerage firm, as strictly fraudulent as the original one invented by Charles Ponzi, that Italian vegetable peddler, smuggler and, after he got out of an American jail, minor fascist official in Mussolini's Italy.
Ponzi, however, was a small-timer. He gulled ordinary folks out of their five- and ten-dollar bills. Madoff's $50 billion game was something else again. It was completely dependent on his ties to the most august circles of our financial establishment, to major hedge funds and funds of funds, to top-drawer consulting firms, to blue-ribbon nonprofits and to a global aristocracy of the super-rich. True enough, people of middling means, as well as public and union pension funds, got taken too. At the end of the day, however, Madoff's scheme, unlike Ponzi's, was premised on a pervasive insiderism which had everything to do with the way our financial system has been run for the past quarter-century.
Once Madoff was exposed, everybody questioned the credulousness of those who invested with him: why didn't they grow suspicious of such consistently high rates of return? But the equally reasonable question was: why should they have? Not only did you practically need an embossed invitation before you could entrust your loot to Madoff, but the whole financial sector had been enjoying extraordinary returns for a very long time (admittedly, with occasional major hiccups like the dot-com bust of 1999-2000, which somehow seemed to fade quickly from memory).
Keep in mind as well that these lucrative dealings were based on speculative investments in securities so far removed from anything tangible or comprehensible that they seemed to be floating in thin air. The whole system was a Ponzi-like scheme which, like the Energizer Bunny, just kept on going and going and going... until, of course, it didn't.
Locked Into the Bailout State
After 1929, when the old order went down in flames, when it commanded no more credibility and legitimacy than a confidence game, there was an urgent cry to regulate both the malefactors and their rogue system. Indeed, new financial regulation was at the top of, and made up a hefty part of, Roosevelt's New Deal agenda during its first year. That included the Bank Holiday, the creation of the Federal Deposit Insurance Corporation, the passing of the Glass-Steagall Act, which separated commercial from investment banking (their prior cohabitation had been a prime incubator of financial hanky-panky during the Jazz Age of the previous decade), and the first Securities Act to monitor the stock exchange.
One might have anticipated an even more robust response today, given the damage done not only to our domestic economy but to the global one upon which any American economic recovery will rely to a very considerable degree. At the moment, however, financial regulation or re-regulation--given the last thirty years of Washington's fiercely deregulatory policies--seems to have a surprisingly low profile in the new administration's stated plans. Capping bonuses, pay scales and stock options for the financial upper crust is all well and good and should happen promptly, but serious regulation and reform of the financial system must strike much deeper than that.
Instead, the new administration is evidently locked into the bailout state invented by its predecessors, the latest version of which, the creation of a government "bad bank" (whether called that or not) to buy up toxic securities from the private sector, commands increasing attention. A "bad bank" seems a strikingly lose-lose proposition: either we, the taxpaying public, buy or guarantee these securities at something approaching their grossly inflated, largely fictitious value, in which case we will be supporting this second gilded age's financial malfeasance for who knows how long; or the government's "bad bank" buys these shoddy assets at something close to their real value, in which case major banks will remain in lockdown mode, if they survive at all. Worse yet, the administration's latest "bad bank" plan does not even compel rescued institutions to begin lending to anybody, which presumably is the whole point of this new financial welfare system.
Why this timidity and narrowness of vision, which seems less like reform than capitulation? Perhaps it comes, in part, from the extraordinary economic and political throw-weight of the FIRE (finance, insurance, and real estate) sector of our national economy. It has, after all, grown geometrically for decades and is now a vital part of the economy in a way that would have been inconceivable back when the United States was a real industrial powerhouse.
Naturally, FIRE's political influence expanded accordingly, as politicians doing its bidding dismantled the regulatory apparatus installed by the New Deal. Even today, even in ruins, many in that world no doubt hope to keep things more or less that way; and unfortunately, spokesmen for that view--or at least people who used to champion that approach during the Clinton years, including Larry Summers and Robert Rubin (who "earned" more than a $115 million dollars at Citigroup from 1999 to 2008), occupy enormously influential positions in, or as informal advisors to, the new Obama administration.
Still, popular anger and ridicule of the sort our New Deal era ancestors once let loose are growing more and more common, which explains, of course, the newly discovered voice of righteous anger of some of our leading politicians who are feeling the heat. Certain observers have dismissed popular resistance to the bailout state as nothing more than right-wing, Republican-inspired hostility to government intervention of any sort. No doubt that may account for some of it, but much of the anger is indeed righteous, reasonable, and coming from ordinary Americans who simply have had enough.
Progressive-minded people in and outside of government must find a way to make re-regulation urgent business, and to do so outside the imprisoning, politically self-defeating confines of the bailout state. Just weeks ago, the notion of nationalizing the banks seemed irretrievably un-American. Now, it is part of the conversation, even if, for the moment, Obama's savants have ruled it out.
The old order is dying. Let's bury it. The future beckons.