Partying Like It’s 1929
Mar 21st, 2008 at 8:30 am by Susie
As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.
In fact, however, we were partying like it was 1929 — and now it’s 1930.
The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.
Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle. We can only hope that they succeed. Otherwise, the next few years will be very unpleasant — not another Great Depression, hopefully, but surely the worst slump we’ve seen in decades.
Even if Mr. Bernanke pulls it off, however, this is no way to run an economy. It’s time to relearn the lessons of the 1930s, and get the financial system back under control.
And speaking of, In These Times has an in-depth look at Obama’s centrist economics. At this point, I suspect whoever wins the White House isn’t going to have many options anyway:
When it comes to many of the larger issues hounding the economy, Obama hasn’t done much to distinguish himself. He has not been a visionary on the subprime crisis, and his adviser Goolsbee indicated in a New York Times column that the only problem is the rampant fraud that was an integral part of subprime lending. In his proposal to deal with the subprime mortgage debacle, Obama does not support the foreclosure moratorium and interest rate freeze that Clinton and many citizen and labor groups advocate.
But Dean Baker, co-director of the Center on Economic and Policy Research and an early forecaster of housing bubble problems, argues that Obama’s plan is admirable because it is less of a bank bailout than Clinton’s. The problem now, he points out, is not so much the interest rates that are resetting at a higher level, but that the value of people’s houses has declined to less than what they initially paid. Baker advocates guaranteeing people facing foreclosure an option to rent their homes at fair market value. This would avoid many evictions and pressure banks to work out more favorable mortgage agreements.
Obama’s main flaw seems to be excessive caution, not favoritism to the financial services industry, which has contributed almost as much to him as it has to Clinton. But Obama is not beyond influence.
Obama’s national finance chair is Penny Pritzker. Chicago’s wealthy Pritzker family owned half of Superior Bank, a pioneer in subprime lending. When the bank failed in 2001, the family signed a sweetheart deal with federal regulators that let it off with a profit while many depositors lost money. (But Penny’s brother, J.B. Pritzker, is a major Clinton supporter.)
And for years, executives of Exelon, the Illinois-based nuclear utility, have been among Obama’s biggest contributors. (Obama insists nuclear power should not be ruled out as a potential energy source, even if he also promotes alternatives.)
My 88-year-old dad asked me last weekend if he should pull his money out of the bank. I told him that I thought his little credit union was safe for the time being. But who knows?
I just may buy gold and bury it ni the back yard! Anyone notice the wingnut talking heads circling the wagons in defense of deregulation? I caught a snippet that’d run on fox spews, some roundtable of deplorable talking pukes, all screaming that, “It’s not the fault of deregulation, deregulation’s not to blame!” Fuck them.
it’s totally a deregulation problem.
one of the major hits to the new deal occurred when bill clinton, in full-on DLC mode, acquiesced in the repeal of the glass steagall act in 1999.
that law built a firewall between banks and investment houses and had successfully stopped the sort of bank run virus caused by rampant speculation and margin/leverage usage that we are dealing with now.
again, many people in finance are aghast at the foolishness and stupidity of these big speculators.
I was in a meeting yesterday where one participant–COO of a major research firm/trading firm, noted that strong efforts to reduce shenanigans regarding trading houses might fade away “until we have another strong AG”
this did little but promote smirks all around the table thanks to Spitzer’s now well-known sexual proclivities.
Yep. Whatever the politics behind it (Clinton was still fighting for his political life because of the Lewinsky scandal, and Treasury Sec. Robert Rubin left just a few days after it was passed to go to work for Citigroup, who was pushing the repeal), it was a very bad move.
Which is why Obama using the DLC’s senior economist as his main economic adviser - the man who thinks the only problem with subprime lending was the massive fraud - is also something to worry about.