This post is about economics. It is going to be scattered and may not make much sense to those of you that do not understand how my mind works. That’s fine, read it anyway, and ask me questions. We can have a conversation. I’m not brilliant enough to have all the answers. I do have one thing going for me though. I can see the flaws. I can ask questions about why those flaws have not been addressed. I can and will do those things.
First I am going to address a common misconception. We do not live in a free market society. Many economists wish to blame various issues we are facing on the failure of the free market. The market hasn’t been free in a long time. Free implies unregulated. Our market is heavily regulated. I am not saying a market must necessarily be completely unfettered in order to work. But let’s not bullshit ourselves here. The current market isn’t free.
Some people will counter with the statement that while our market is regulated, it is deregulation that created the current recession. This is another mistake being made, I believe in most cases intentionally (among those that try to tell us what to think), for political reasons. Deregulation never happened. What happened was re-regulation. The worst kind of re-regulation. Everything was re-regulated so as to benefit major corporations and the banks, and to screw the average person. Close your mouth. I’m not finished yet.
Let’s look at the housing market. This is an example most will be familiar with. Quick lesson. Freddie Mac and Fannie Mae are government created private corporations. The corporations are owned by private individuals and stockholders, but have the backing of the government. In order to keep having the backing of the government, they have to pay careful attention to the wishes of the federal government, or they can lose that backing and they will be on their own (starting to see how the market isn’t even remotely free?).
These companies buy mortgages from banks. Banks sell their mortgages because they can pocket profits quickly instead of waiting years. In the 1990s politicians decided they wanted more people to be able to borrow money. They then loosened the restrictions on what kinds of mortgages Fannie and Freddie could buy. They then began to set quotas saying they had to buy certain amounts of mortgages every year that were risky. Mortgages taken out by people that would have been denied previously because banks were not willing to lend out money to people who would probably not pay it back. This allowed the banks to lay that risk off by selling the mortgages to Fannie and Freddie.
Normally these would be considered high risk, high reward investments. However, because of being able to sell to federally backed F&F, they turned into low risk, high reward for the banks. So what was the plan for when these mortgages started failing? Well, the federal government guaranteed that if F&F met the quotas, then the federal government would help mitigate the losses for mortgages that went bad.
The federal government doesn’t have money. It is fully funded by the hard earned money of citizens of the United States. This is the socialization of risk and privatization of profits. The American people assume the risk, while the banks pull in profits regardless of how their lending practices play out.
Not only did the federal government do this. But major corporations such as J.P. Morgan figured out a way to take advantage of this in the private sector. Because the government was for political reasons pretending these investment practices were safe, that lead to bundles of this type of mortgage being rated as safe by the S&P 500 and Moody’s. So what private companies did is they created a similar situation. They would essentially insure their bad investments with companies like AIG. Insurance is normally heavily regulated but this had never been done before and everything was being done under the table so nobody really knew what was going on.
What was going on was that AIG was insuring insane numbers of these investments, without holding the recommended reserves in preparation to pay out should the investments fail. Having the investments insured allowed banks to lend more and more money, and nobody was keeping cash in reserves to cover the failure we now know was inevitable.
When the house of cards tumbled and it looked like major banks were going to crumble under the weight of their own irresponsible actions. The government stepped. With our money. This was absolutely necessary and the banks knew it was necessary. Why was it necessary? Well in 1999 we repealed Glass-Steagall. A bill introduced and passed after the great depression that made it illegal for investment banks (risk taking gamblers) to gamble with the money of people’s savings accounts. When that got repealed, massive numbers of consumer banks merged with massive numbers of investment banks. And the money they were lending that caused the crash was the money in the average joe’s savings account. If the government hadn’t stepped in, everybody would have lost everything again.
So come back to this, the socialization of risk, and the privatization of profits. If one of these major banks makes bad decisions, the American people absorb the losses, and when their bad decisions work out, the banks pocket the profits.
This is a gross simplification of everything that happened and I suggest if you wish to come to a better understanding of why everything is so messed up right now, you check out books by Ph.D.’s in economics. I’m just a humble college dropout.
I’m still not done though. All the above was to demonstrate what I mean by the socialization of risk and the privatization of profits, and thus demonstrate what I mean when I make a distinction between de-regulation, and re-regulation. The government didn’t just tell F&F they could make these loans, they incentivised them to do so by threat of punishment should they not, and promise of reward if they did do this thing.
See how the market isn’t free? So if we don’t live in a capitalist country, then what is this? Well, it’s a new thing. Which is convenient for the politicians. When we were fighting fascists in WWII and communists during the cold war we ran our propaganda machines pretty hard against them. Neither of those things would fly in this country. Not blatantly.
So what we have is possibly worse. We have massive corporations that control the vast majority of wealth in this country. The total assets of the six largest banks in the country total 63% GDP. That is some incredibly buying power. If those banks fail by the way, we have seen, they will be bailed out with our money. When they make massive profits, they keep most of it for themselves. What do they do with this money? Well they’d like us to think they spend it all on jets and yachts, and expensive champaign. In reality, they leverage their buying power in the political marketplace. Around 90% of candidates elected in this country are those with the most money. Where does that money come from? Well of the greatest contributors to each of 2012’s presidential candidates. Goldman Sachs, Citigroup, J.P. Morgan Chase, and Morgan Stanley contributed to both of them. That’s just the official numbers. Who knows how many loopholes are exploited to ensure that major financial institutions can swing elections as they please? I do not. I expect it’s more than a few.
So here is what we know. The major financial institutions have the greatest sway over who is elected to office (money). The politicians that have been elected with the money of those institutions recently re-regulated the financial industry to enable those in that industry to make a significant amount of money in the short term. The government also then handed over taxpayer dollars when the house of cards fell.
Bank of America recently was found to be foreclosing on homes they couldn’t actually prove they owned. Last time I checked a poor person can go to prison for stealing a car. Bank of America was stealing the homes of thousands of people and they just got fined.
In the end, the name of this kind of government will be determined by future generations. For now, I’ll just have to sum it up by saying: I don’t know what to call it, but it sure does suck.
