Derivatives

English: Wall Street sign on Wall Street

English: Wall Street sign on Wall Street (Photo credit: Wikipedia)

The abuse of unregulated derivatives by Wall Street caused the Great Recession. That is the conclusion reached in Republic, Lost, How Money Corrupts Congress–and a Plan to Stop It by Lawrence Lessig. The following quotation is the simple analogy he uses to explain what happened. The regulation of derivatives is compared to laws regulating automobile highway speeds.

“A speed limit that applies to black cars only will not only incentivize the sale of colorful vehicles, it will also be a boon to the paint departments of auto body shops everywhere. That’s the story of Wall Street in the 2000s. While some portion of the market for derivatives was no doubt driven by a genuine meed for the particular flexibility of a derivative, a huge proportion was simply black cars being painted red. The winners in this new market were the drivers of those freshly painted cars, and the firms that had done the paint jobs (aka Wall Street). The losers were–surprise, surprise–the rest of us.”

The derivatives in question were backed by US mortgages and rated AAA by Standard and Poor and others. Derivatives were exempt from regulation by act of Congress as urged by Alan Greenspan and others. Financial instruments still regulated by law were recast as derivatives to escape regulation. And without the discipline of regulation, Wall Street took on excessive risk. And it came tumbling down in 2007-8 birthing the Great Recession.

Mohsin Hamid

Cover of "The Reluctant Fundamentalist"

Cover of The Reluctant Fundamentalist

Mohsin Hamid is the Pakistani author of three novels: Moth Smoke, The Reluctant Fundamentalist, and How to Get Filthy Rich in Rising Asia: A Novel. I have just finished reading all three and I am impressed with his prose styling which in clarity reminds me of Ernest Hemingway. If you chose to read only one of his books, my recommendation would be The Reluctant Fundamentalist.

It is the story of a western-educated Pakistani who lands a high paying job on Wall Street shortly before the attacks of 9/11/2001. After 9/11, he begins to feel out-of-place working in New York and eventually he decides to quit his job and return to Pakistan. Giving voice to his thoughts, he attracts a group of like-minded followers, some of whom are violent men. He is neither violent himself nor does he advocate violence. However, he is labelled a terrorist leader in the West and an assassin is sent to kill him. The arrival of the assassin is anticipated and prevented from carrying out his assignment.

The Reluctant Fundamentalist grows and evolves as he learns to think for himself and to express his thoughts. It takes courage to speak out in today’s world, and the reader is encouraged to follow suit.

Wall Street

Representative Barney Frank, co-architect of t...

Representative Barney Frank, co-architect of the Act (Photo credit: Wikipedia)

Too big to fail
Too big to jail
Breaking up is hard to do
But it’s past due
Split the banks
Reinstate Glass-Steagall
Dodd-Frank is
Too little, too late
The Chinese wall between
Banking and investment banking
Never worked at all
Too big to fail
Not too big to nail
Not too big to jail
Save us from the banksters
And their 1% overlords.

The missing middle

Outsourcing-offshoring-resized

Outsourcing-offshoring-resized (Photo credit: Wikipedia)

The middle is missing in both our economy and in our politics. One is linked to the other and that is the problem. Both must be restored to correct the changes that have occurred over the past 30+ years. The middle class must be revived in an economy polarized between the rich and the poor, the 1% and the 99%. The polarization between the Right and the Left, Democrat and Republican, must also be lessened so that compromise is again possible. Without a vibrant middle class and political compromise, our democracy will fail. It is showing signs of failing now.

Outsourcing and offshoring jobs lead to a temporary increase in profits which finds approval on Wall Street. Over a period of years, outsourcing and offshoring destroy the middle class and reduce the number of customers who can afford American-made products. As the middle class shrivels away, we are left with the rich and the relatively poor, the 1% and the 99%, and that leads to political polarization. And political polarization leads to government policies favoring the wealthy at the expense of everyone else.

My solution to the problem is twofold: much higher taxes on the 1% and government policies discouraging outsourcing and offshoring. It is current government policies which have encouraged the outsourcing and offshoring of jobs that have decimated the middle class and led to our current polarized politics. If current government policies have done that, they can and must be reversed. Confiscatory tax levels for the 1% will dampen their desire to monopolize the fruits of the economy. Some might even desire to emulate Gérard Depardieu of France and seek Russian citizenship to escape high taxes. Let them.

Predatory lenders

what "Home-Forclosure" (victims of p...

what “Home-Forclosure” (victims of predatory lending practices) are going through… (Photo credit: v i p e z)

Why are there predatory lenders who are allowed to prey on the poor and the helpless among us? Isn’t government there to protect us from greedy and unscrupulous individuals and businesses? Some government agencies try to enforce the law and protect the weak. If they succeed at the state level, predatory lenders will just move to another state, there are 50 of them you know. In many jurisdictions, legislators are bribed to change the law or enforcement agencies encouraged to turn a blind eye. Behind all the pious language about markets and competition regulating behavior is the sad fact that the high interest rates of predatory lenders, be they Wall Street banks or local auto title lenders, are an efficient mechanism of taking from the poor and giving to the wealthy. And that is a source of income that the 1% will fight to keep.