The Stock Market Tanks

The Dow Jones Industrial Average dropped yesterday to where it was in 1997. The date caught my attention. That was the year before the Glass-Stiegel Act was repealed, allowing banks into the investment business. I hope the investor class is realizing that this may not be a coincidence.

What is the stock market? It is where investors prognosticate on the future value of a company. When the stock price rises or falls, it is not always because anything real happened at the company. Indeed, in this case, the entire market has been suffering reflecting the perception that the problem is system wide. But, what exactly is the problem?

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If you watch Fox News, the problem was Fannie Mae and Freddie Mac giving bad loans to people who did not deserve them. This caused the housing bubble which, when it crashed, brought on the credit crunch, which in turn brought on the economic slowdown across the board. This conveniently lays the blame at the foot of a quasi-government agency, one specifically designed to intervene in the market on behalf of people who might have trouble qualifying for loans. This scenario is not true, however, it is just a GOP talking point.

If you listen to those on the populist left like David Sirota, the whole crisis has to do with a conspiracy of the wealthy and well-connected, including some Democrats on the Senate Banking panel who overturned the Glass-Stiegel Act and refused to require the regulation of derivatives. This explanation is closer to the truth, except that it is not clear that there was any conspiracy. There was, instead, the kind of group-think worship of the "laws of the market" accompanied by the deification of Alan Greenspan and the Clinton administration’s happy talk about globalization.

The real culprit, however, was the stock traders themselves who refused to demand proof that a company was going to produce the kind of profits that warranted their rising stock price. Even more, these same traders invented something called "financial instruments" like derivatives that resemble a ponzi scheme to my untrained eyes, and to any set of eyes were parasitic financial instruments which, like many parasites, ended up infecting the host organism. To the extent that the stock market crash of the past six months has rid the stock traders of the expectation that money will continue to roll their way just because they show up and are creative with their financial instruments, than it must be seen as a necessary corrective.

The stock market crash cannot be seen as a good thing because so many innocent people got wrapped up in it and those close to retirement had their hopes raised for a financial stability that is now denied them. Nor is it clear that the Obama administration will pursue the kind of policies to drastically change the culture of Wall Street. They could start by re-instating the Glass-Stiegel Act. They are making correct moves by limiting executive compensation, although they should extend that rule beyond those companies requiring federal money and make all compensation about $500k no longer tax deductible as a business expense. Why have we seen no SEC prosecutions so far? And, instead of merely repealing the Bush tax cuts, it is time to bring back higher tax rates. The dream of excessive wealth, the greed at the heart of the system, this is what really caused the current economic meltdown. And, changing the culture of greed will require the erection of a new set of cultural standards. This is an area crying out for audacity.

 

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8 years 7 months ago
To the extent that the "financial instruments" were the result of fraud, fees should be returned and applied to loan balances. To the extent that organizations committed fraud, triple damages should be imposed - starting a the top and including any property hidden under spousal or other family ownership.
8 years 7 months ago
Mr Binder Is justice only administered to the bank and stock executives? Just a thought, but something tells me if the good times kept rolllng no one would be complaining.
8 years 7 months ago
There is sufficient blame for many people to share for the collapse of the stock market and the wreckage of the economy. I blame the partisans of both parties who let their combination of greed and political stubbornness drive them to foolish economic decisions. My wife and I had planned a comfortable retirement...now, because of the reckless actions of greedy people (none of whom will likely ever be punished), our retirement funds are virtually gone. Republicans will never accept the higher taxes and market regulation we need; Democrats will never accept the spending limitations that will also be required. I have little hope for economic recovery...or moral leadership of the financial industry...any time soon.
8 years 7 months ago
Very thought-provoking post. I realize you were limited by space, but I'd like to see you expand on your quick dismissal as 'GOP talking point' the problem of loans being extended to those who could not afford them (or who could afford them only based on the unwise assumption that home values indefinitely would continue their rapid ascent). Yes, I agree that the creators of the instruments that packaged these bad loans bear a lion's share of the blame. But why not also blame the bad loans themselves, and the public policy decisions that lead to them? Didn't they come first in the causation chain?
8 years 7 months ago
Mr Winters Your just an expert on everything! You wrote, "Even more, these same traders invented something called "financial instruments" like derivatives that resemble a ponzi scheme to my untrained eyes." Yet, you feel so qualified to post a blog article about it. Is this Ignation thought today?

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