Posts Tagged ‘Federal Reserve’

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206423  Deficit Apocalypse

The new paper by Johns Hopkins University economist Laurence Ball, “The Fed and Lehman Brothers” (pdf), is creating quite a stir. And for good reason.

Fed officials have not been transparent about the Lehman crisis. Their explanations for their actions rest on flawed economic and legal reasoning and dubious factual claims.

Ball, on the basis of exhaustive research, calls out the officials in charge—Treasury Secretary Hank Paulson (played by William Hurt in the clip from Too Big to Fail at the top of the post), Fed chair Ben Bernanke, and New York Fed President Timothy Geithner—for not bailing out Lehman Brothers in September 2008. His argument is that the Federal Reserve did have the authority to rescue Lehman but chose not to—and they chose not to because they acceded authority to Paulson, who “feared the political firestorm that would have followed a rescue.”

Of course the decision not to rescue Lehman Brothers was political. And, if they’d taken the decision to bailout the failed global financial services firm, that would have been political, too.

The fact is, Paulson, Bernanke, and Geithner (as well as mainstream economists and other economic policymakers) were caught in their own logic of deregulating financial institutions and letting “the market” work according to its own rules (because, as Paulson admits, “they were making too much money”). That meant the emergence of a giant financial bubble—based on a toxic mix of subprime mortgages, mortgage-backed securities, and credit-default swaps—that would eventually burst. To save Lehman would have meant questioning those same private, market-based rules—with the hope that letting Lehman go under would restore order and not bring the rest of the financial system to its knees.

But, just so we understand, if they had chosen to rescue Lehman, that also would have been a political decision—to save the bankers that had made enormous profits from fees and bets on both simple and complex financial deals while, from 2007 on, everyone else was suffering from mounting foreclosures, homelessness, and unemployment.

As we know, they took the political decision not to bailout Lehman and then they covered it up, behind a series of stories—they had carefully examined the adequacy of Lehman’s collateral and they lacked the legal authority to intervene—that are convincingly disputed by Ball. Documenting the lack of transparency on the part of U.S. financial authorities about the decisions that were and were not taken in 2008 (from Bear Sterns through Lehman Brothers to AIG) is the real significance of Ball’s investigation.

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But it’s not the real political issue. Whether or not to rescue Lehman pales into insignificance when compared to two other events: the decision to let the financial system spiral out of control, and the decision not to nationalize the major financial institutions. The fact is, profits in the financial sector were enormous, reaching 40 percent of total domestic profits by the mid-2000s. It was a political decision to allow those profits to grow, even as the financial mechanisms that generated those profits were creating the financial fragility that led to the crash of 2007-08.

And then, after the crash, when the U.S. government owned an increasingly large share of the financial sector (from AIG to Ally Bank, the former GM financing arm), it was a political decision not to nationalize—or, better, not to effectively utilize the de facto nationalization of—the financial institutions it had rescued. The Obama administration and the Fed could have taken over decisionmaking in the banks, insurance companies, and government-sponsored enterprises it then owned (in exchange for the direct bailouts and other financial commitments) but they chose not to, preferring instead to negotiate payback plans and return them as quickly as possible to private ownership. That, too, was a political decision.

Ball admits “We will never know what Lehman Brothers’ long-term fate would have been if the Fed rescued it from its liquidity crisis.” True.

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But we do know what the fate of the U.S. economy has been as the result of two, much more important political decisions—to deregulate financial markets beginning in the 1990s and to not nationalize the major financial institutions after they were rescued with trillions of dollars of public financing and commitments. The first decision led directly to the crash of 2007-08, the second to the Second Great Depression and further concentration of Too Big to Fail financial institutions.

And, in the United States and around the world, we’re still living through the disastrous consequences of both of those essentially political decisions.

Regular readers of this blog know that I take seriously the idea that representations of the economy are regularly produced and disseminated in many different forms and social sites. They are generated, of course, within the discipline of economics as well as by official (degreed) economists in think tanks, financial institutions, the media, and elsewhere. But, I argue, economic representations are also created and circulate outside economics—in a kind of Bakhtinian carnival—in academic departments other than economics (from anthropology to cultural studies) and outside the academy itself (in painting, film, graffiti, music, cartoons, and so on).

Some of these alternative economic representations I’m aware of. But there are many others I’m not. One of them showed up in a recent piece on “Feeling Let Down and Left Behind, With Little Hope for Better,” on the role of an e-cigarette shop in Wilkes County, North Carolina.

Lonnie Ramsay, 45, walked in looking for help. He described a nasty falling-out with his girlfriend and said he just wanted to get home to a nearby city. But he only had $25 to his name. He said he had been making $10 an hour at a factory.

One Friday afternoon someone brought a pair of virtual reality goggles hooked up to a laptop to the shop. Mr. Foster exhaled a cloud that smelled like a Popsicle. He said he had been reading up on the idea, explored in the “Zeitgeist” movie, of a “resource-based economy” — a system in which, he said, “There’s no money and everything is controlled by computers and resources are equally distributed and there’s no ownership or anything like that.”

“The system we have now is going to collapse,” he said. “And technology, the automation process, is going to keep taking over and over.”

That, he said, would free up people to do what they wanted.

Chris Lentz, 36, a worker for a utility company in a pair of mud-caked boots, frowned and asked, “If people were just given everything they ever needed, then what’s the point of going to work?”

And so it went: the thick, sweet haze; the frustrations, diversions and digital toys; and the sense, in this jagged, hyperconnected moment, that everything is possible, or nothing is.

The essay itself is a representation of the economy—of an America riddled with economic anxieties, based on the “Fear that an honest, 40-hour working-class job can no longer pay the bills.”

And then, in the midst of that representation, there’s another: a reference to the Zeitgeist film series, especially (I am guessing by the quotations) the second film, Zeitgeist: Addendum from 2008. It was produced and directed by Peter Joseph, as a sequel to the 2007 film, Zeitgeist: The Movie. (There’s a third installment, Zeitgeist: Moving Forward, which premiered in 2011.)

What I find interesting about the film is less the conspiracy-driven analysis of the monetary system and the Federal Reserve (although there’s a certain validity to the idea that people are forced to have the freedom to sell their ability to work in order to pay off their debt) than the argument that capitalism perpetuates the conditions it claims to address and that it’s possible to imagine a different economy, one that puts environmental friendliness, sustainability, and abundance as fundamental economic and social goals. Zeitgeist offers a particular representation of the economy as it is and how it can be made better, in a manner that runs directly counter to the representations offered by most official economists in the United States.

That and the fact that the film has been viewed on Youtube over half a million times.