Letter 2 America for May 13, 2014

Dear America,

It's been a month or two for newly released books of broad interest.  First there was Thomas Picketty's book, "Captital in the Twenty-First Century," and now, Timothy Geithner has released his own apology for the way in which he handled the economic crisis of 2008 for his part as Treasury Secretary in the form of his book, "Stress Test."  After hearing Geithner interviewed, it is apparent to me that the establishment in the realm of finance learned nothing from the past six years, and despite the Dodd-Frank Act, we will likely have another round of the same kind of economic disaster in the not-too-distant future.  When interviewed, Geithner's position is as it always was: save the big guys in order to save the rest of us.  He continues to deny that letting financial institutions fail would not only have accomplished a desirable end, but would have been the fair thing to do in the bargain.  He insists that the only way to prevent unemployment on the Depression level was to bail out the banks so as to prevent any more of them from failing after Lehman Brothers went under, and perhaps he is right.  But whether he is or not, all his book does is beg the question of how we got into the position of having to save venal, avaricious predators from the fate they created for all of us while the rest of us struggled to keep from drowning in the financial cesspool they dug for us.

Unfortunately, the interviewer, Robert Seigel of NPR's All Things Considered, asked Geithner all of the questions that he had prepared to answer given his financial-system-insider's outlook, but failed to ask him the one central question that no one discusses today, nor did they ever.  He should have asked Geithner if the financial crisis would have occurred if President Clinton had not listened to then-Treasury Secretary Larry Summers and had vetoed the repeal of the Glass-Steagall Act instead of signing it.  The Glass-Steagall Act was passed in the 1930's in response to the last catastrophic collapse of our financial system starting in 1929, and it kept us from suffering another for sixty years.  It took only about ten years after its repeal for the same kind of catastrophe to occur again and for essentially the same reasons...all because Glass-Steagall was repealed.  Yet, the Republican-conservative notion that laws like Dodd-Frank serve only to impede the kind of financial activity that we need to grow continues to enjoy credence from insiders like Geithner, who self-servingly thinks like the rest of them that the cause of the crisis was not the rampant betting on the prospect of financial failure in consequence of irresponsible lending practices, it was the lending itself.  It wasn't the fact that bankers had to pay up on "credit default swaps" and other bizarre derivatives when mortgages started to fail; it was the failure of the mortgages themselves that put millions out of work, stymied demand, and thus led to not just low economic growth, but decline in our economy.

That idea made no sense then, and it makes no sense now.  If people began losing the houses they had bought but couldn't afford, they would have paid the price for overreaching financially, but that problem could have been overcome.  All we needed, and I said this at the time, was a program of federal mortgage guarantees based on restructured mortgages for those who were having trouble keeping up.  The banks could then have forestalled payment of the obligations they had undertaken in the form of those derivatives without loans from the federal government because those mortgages wouldn't have failed, and the only losers would have been the people who bought the derivatives, and thereby bet on the rest of us to fail...just deserts if you ask me.  Instead, what we did is perpetuate the cycle by which the disparity in wealth from the top stratum of our economy to the bottom burgeoned even further.  Somehow, the wealthy managed to come out of the water dry, as the Russians say, leaving the rest of us to tread water until general prosperity, that is jobs, returned, and they haven't completely done so even as of now...six years after the crisis blew up in all our faces.  It is just a further demonstration of the principle that Picketty propounded in his book, and that old saws have pointed out for centuries.  The rich always get richer, and guys like Timothy Geithner are OK with that.  That's why Picketty's book is so important.

He points out, at least in interviews unlike Geithner, that capital should not reap all the rewards from our dynamism and hard work.  At some point, labor must be rewarded for sustaining the system as was the case after the last depression and World War II.  During that era, prosperity of a more universal nature supplanted the old regime that had started with the "Gilded Age" in the late nineteenth century.  Our economy came more into balance with regard to rewards for those who created prosperity...that is labor got more and capital/management got less.  In the fifties, the average corporate president made about forty times what the average worker made.  Now, he makes hundreds of times what the worker made, and the worker has made no financial progress as adjusted for the passage of economic time while the managers and owners have continued to increase their wealth, and hence their creature-comfort.  The combination of the few taking more and the failure of demand to grow because labor's share of the wealth hasn't grown has led to the stagnation we are now experiencing.  It isn't that taxes are too high, as Picketty points out by citing the fact that after World War II the top marginal rate was 82% during the greatest expansion of universal prosperity in American history.  It isn't that regulation "kills jobs" as the lack of "moral hazard" extant in 2008 when the entire crisis began demonstrates.  It's kind of like the final scene in King Kong when Carl Denham says, "It wasn't the planes that killed him.  'Twas beauty killed the beast."  And it was greed that killed our economy.  Not the attempt to control it.

Your friend,

Mike