Who to blame?

If you’re interested in pointing the finger at the individuals who caused the biggest financial hissy fit since the Great Depression, then read this article. There are 25 names to choose from. Leading the pack is Alan Greenspan – you know, the dude who loved weapons of mass destruction (derivatives) and encouraged Mum and Dad to take out variable interest rate home loans. He’s also the one who needs to look up a dictionary to find out what the word “regulation” actually means. Greenspan would be at the top of my hit list too. He is busy defending himself as former friends, colleagues and economists point the accusatory finger at him.

But there are honourable mentions for Gordon Brown, UK PM, who also needs to cruise the dictionary for “regulation” and Bill Clinton for his idiocy in repealing the Glass-Steagall Act (the Depression-era law that separated investment and commercial banking). Because commercial banks (ie banks that accept deposits and offer loans) were salivating to get into the financial products market and offer stocks, mutual funds and also underwrite securities, Prez Clinton signed the Financial Services Modernization Act 1999 (known as Gramm-Leach-Bliley Act). This Act (of stupidity) erased the dividing wall between commercial and investment banks, meaning that commercial banks could own investment banks and vice-versa. This effectively created superbanks, with Citigroup being the first superbank, and allowed the superbanks to tie their lending activities to their investment activities (the very thing Glass-Steagall prevented. Greedy commercial banks were involved in stock market investment in the pre-Depression era and this was seen as a major cause of the 1929 financial crash. Commercial banks of that era had taken on too much risk, were speculating with depositors’ money and making unsound loans.) And so the sub-prime avalanche started with the era of the superbanks.

This is as I understand it. In fact, you can read very interesting testimony before the Committee on Financial Services, US House of Reps, Oct 2007 from Robert Kuttner, an economist and financial journalist. Having done a ton of research for his many books, particularly around the causes of the Great Depression and efforts in the 1930s to create a financial system that would prevent a repetition of a financial collapse,  Kuttner says:

“Since repeal of Glass-Steagall in 1999, after more than a decade of defacto inroads, superbanks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s“.

And then of course there’s good old Dubya, who gave the finger to sound regulation and whole-heartedly embraced ninjas.

There were of course some clever people crying out in the wildnerness – academics and financial experts who clearly saw the warning signs of an impending humongous financial crisis. Professor Nouriel Roubini is one of these people.  Back in 2006, Roubini (an economist dubbed Dr Doom) was ringing the alarm bells and telling the IMF that the US economy was at risk of a housing bust and deep recession, which would have dire consequences for the world. He referred to Dubya, Henry Paulson and Ben Bernanke as “a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America”. (Love this guy: what’s his phone number?!!)

Dr Doom’s recent warnings are that “banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009”. Great.

Meanwhile, what can the Prez of Hope & Change do? Millions are looking to Obama (I’ve seen him referred to as The One) as the saviour who will pull us out of this economic doom and gloom. A really great article in The Age pointed out that if the global financial hissy fit was all that Obama had to deal with – well, we might be okay. But he faces multiple convergent crises – shortage of natural resources; proliferation of nuclear weapons; global warming; and failure of the American bid to establish a global empire and the current decline of US influence abroad.  All are inter-related.

Read the article, it’s a great critique and offers up a reason why all these crises emerged at once. Future historians will study, analyse and draw the conclusion that our era is the story of:

“…how the largest government, business, military and media organisations began to tell lies to themselves and others in pursuit of, or subservience to, wealth and power. Banks, hedge funds, ratings agencies, regulatory agencies, intelligence services, the White House, the Pentagon and mainstream news organisations can grind inconvenient truths to dust, layer by bureaucratic layer, until the convenient lies that had been wanted all along are presented to decision-makers at the top.”

In other words, it will be a future study of groupthink (a concept incidentally I’ve been discussing with my Uni students recently).