Matt Taibbi concluded that the 2008 Wall Street bailout had “built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors.” In this post-crash environment, the largest financial institutions gained more of a hegemonic grip than ever, with the five biggest banks having come to own almost half the industry by 2015.
BlackRock is a global financial giant with customers in 100 countries and its tentacles in major asset classes all over the world; and it now manages the spigots to trillions of bailout dollars from the Federal Reserve. The fate of a large portion of the country’s corporations has been put in the hands of a megalithic private entity with the private capitalist mandate to make as much money as possible for its owners and investors; and that is what it has proceeded to do.
Insolvent Wall Street banks have been quietly bailed out again. Banks made risk-free by the government should be public utilities.
When the Dodd Frank Act was passed in 2010, President Obama triumphantly declared, “No more bailouts!” But what the Act actually said was that the next time the banks failed, they would be subject to “bail ins” – the funds of their creditors, including their large depositors, would be tapped to cover their bad loans.
Congress seems to be at war with the states. Only $150 billion of its nearly $3 trillion coronavirus relief package – a mere 5% – has been allocated to the 50 states; and they are not allowed to use it where they need it most, to plug the holes in their budgets caused by the mandatory shutdown. On April 22, Senate Majority Leader Mitch McConnell said he was opposed to additional federal aid to the states, and that his preference was to allow states to go bankrupt.
In what is being called the worst financial crisis since 1929, the US stock market has lost a third of its value in the space of a month, wiping out all of its gains of the last three years. When the Federal Reserve tried to ride to the rescue, it only succeeded in making matters worse. The government then pulled out all the stops. To our staunchly capitalist leaders, socialism is suddenly looking good.
When the World Health Organization announced on February 24th that it was time to prepare for a global pandemic, the stock market plummeted. Over the following week, the Dow Jones Industrial Average dropped by more than 3,500 points or over 10%. In an attempt to contain the damage, on March 3rd the Federal Reserve slashed the fed funds rate from 1.5% to 1.0%, in their first emergency rate move and biggest one-time cut since the 2008 financial crisis. But rather than reassuring investors, the move fueled another panic sell-off.
While U.S. advocates and local politicians struggle to get their first public banks chartered, Mexico’s new president has begun construction on 2,700 branches of a government-owned bank to be completed in 2021, when it will be the largest bank in the country. At a press conference on Jan. 6, he said the neoliberal model had failed; private banks were not serving the poor and people outside the cities, so the government had to step in.
Although the repo market is little known to most people, it is a $1-trillion-a-day credit machine, in which not just banks but hedge funds and other “shadow banks” borrow to finance their trades. Under the Federal Reserve Act, the central bank’s lending window is open only to licensed depository banks; but the Fed is now pouring billions of dollars into the repo (repurchase agreements) market, in effect making risk-free loans to speculators at less than 2%.
What’s going on in the repo market? Rates on repurchase agreements (“repo”) should be around 2%, in line with the fed funds rate. But they shot up to over 5% on September 16 and got as high as 10% on September 17. Yet banks were refusing to lend to each other, evidently passing up big profits to hold onto their cash – just as they did in the housing market crash and Great Recession of 2008-09.
This 10-page paper was written for the Economics of Happiness Conference co-sponsored by Local Futures, held in Jeonju, Korea, on October 16-17, where I was the keynote speaker — a wonderful city and great experience!
Satisfaction in the workplace is a major component of the “happiness” index; but it is a satisfaction that young people joining the workforce today are not feeling. In a 2017 book titled Kids These Days: Human Capital and the Making of Millennials, Malcolm Harris asks why the millennial generation – those born between 1981 and 1996 – are so burned out. His answer is, “the economy.” Millennials are bearing the brunt of the economic damage wrought by late 20thcentury capitalism, with economic insecurities throwing them into a state of perpetual panic. Harris argues that if they want to meaningfully improve their lives and the lives of future generations, they will have to overthrow the system and rewrite the social contract.
Conceding that their grip on the economy is slipping, central bankers are proposing a radical economic reset that would shift yet more power from government to themselves.
Central bankers are acknowledging that they are out of ammunition. Mark Carney, the soon-to-be-retiring head of the Bank of England, said in a speech at the annual meeting of central bankers in August in Jackson Hole, Wyoming, “In the longer-term, we need to change the game.” The same point was made by Philipp Hildebrand, former head of the Swiss National Bank, in an August 2019 interview with Bloomberg. “Really there is little if any ammunition left,” he said. “More of the same in terms of monetary policy is unlikely to be an appropriate response if we get into a recession or sharp downturn.”
We are again reaching the point in the business cycle known as “peak debt,” when debts have compounded to the point that their cumulative total cannot be paid. Student debt, credit card debt, auto loans, business debt and sovereign debt are all higher than they have ever been. As economist Michael Hudson writes in his provocative 2018 book, “…and forgive them their debts,” debts that can’t be paid won’t be paid. The question, he says, is how they won’t be paid.
The Democratic Party has clearly swung to the progressive left, with candidates in the first round of presidential debates coming up with one program after another to help the poor, the disadvantaged and the struggling middle class. Proposals ranged from a Universal Basic Income to Medicare for All to a Green New Deal to student debt forgiveness and free college tuition. The problem, as Stuart Varney observed on FOX Business, was that no one had a viable way to pay for it all without raising taxes or taking from other programs, a hard sell to voters. If robbing Peter to pay Paul is the only alternative, the proposals will go the way of Trump’s trillion dollar infrastructure bill for lack of funding.