Middle Israel: The writing on Wall Street’s spires

Hardly seven years after religious fanatics punctured Manhattan’s fabled skyline, economic disease sprang from its financial bowels, challenging America’s economic vitality, sway and faith.

By
September 30, 2018 11:10
Wall street

Wall street. (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)

 
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It was September 11’s sequel.

Hardly seven years after religious fanatics punctured Manhattan’s fabled skyline, economic disease sprang from its financial bowels, challenging America’s economic vitality, sway and faith.

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Investment giant Lehman Brothers’ bankruptcy on 15 September 2008 arrived 48 hours before the Federal Reserve bailed out teetering insurance giant AIG to the tune of $85 billion, and a week after the Treasury took over Fannie Mae and Freddie Mack, the housing lenders that extended $6 trillion in mortgages, half the entire market at the time.

Drama on the scale of the 1929 Great Crash was fast unfolding, underscored by then-Fed chairman Ben Bernanke’s statement to lawmakers Thursday, 18 September, “If we don’t do this we may not have an economy on Monday.”

By “this” Bernanke meant that the already debilitated American taxpayers should now buy $700b. worth of toxic assets, as they indeed did after the Emergency Economic Stabilization Act became law the following month.

Financial contagion spread far and wide. Britain, for instance, spent £500b. on bank bailouts, Spanish housing prices fell 25%, and American households’ median wealth plunged from more than $106,000 in 2005 to less than $70,000 by 2011, while unemployment climbed to 10% by 2009.

What, then, happened a decade ago, and what does it mean today?

WHAT HAPPENED was financial robbery, fueled by conceited regulators and blind politicians.

In the American housing market, regulators led by then-Federal Reserve chairman Alan Greenspan, effectively allowed any lender to loan any borrower any mortgage.

The result was that predatory lenders lured weak borrowers, people with very low and irregular incomes, to buy houses with mortgages structured so that initial repayments would be low before rising, in subsequent repayments, to market levels.

The gullible borrowers were led to believe that after paying their deal’s low repayments they would sell the newly bought homes for much more than the mortgages they took, and thus both repay the mortgages and remain with profits.

This was fine as long as the market rose. Yet the market ultimately fell, having become crowded with speculators who fueled a construction frenzy that created a housing surplus.

Now unable to sell their houses, and therefore also unable to repay their mortgages, 1.3 million houses were foreclosed and their inhabitants evicted in 2007 alone, reflecting $0.5 trillion in lost debts.

The regulatory dereliction behind this catastrophe reflected the ultra-capitalist Greenspan’s dogma that the markets would regulate themselves, and that supply and demand are predestined to always meet. In reality, the homeless remained homeless despite their demand, and indeed were now also penniless and deep in debt.

Greenspan, in other words, was for this fiasco what Moshe Dayan was for the Yom Kippur War. However, lurking behind Greenspan, whose eclipse was intellectual, were thousands of businesspeople whose eclipse was moral.


Horizontally, in state after state and in deal after deal, greedy lenders misled poor borrowers into the financial holes where they now were trapped.

Vertically, what began down in the provincial mortgage bank climbed like an inferno to the executive suites atop Wall Street’s spires, where investment bankers now pushed wealthy clients into the boiling housing market by making them buy newly minted financial deformities with code names like CDOs (collateralized debt obligations) and MBSes (mortgage based securities).

This financial orgy happened not only because of the regulators’ license, but also, and more crucially, because of the politicians’ response to September 11.

FACED WITH the attacks on Manhattan and the Pentagon, the politicians followed Greenspan’s example, which in that situation was actually prudent.

Fearing that the attacks’ shock would inspire economic pessimism and thus depress consumer demand and trigger recession, the Fed gradually cut interest rates, which fell from 3.5% to 1.75%, their lowest level in 40 years.

It was in that spirit that president George W. Bush told the American people to go shopping and to “get down to Disney World” and to “Take your families and enjoy life.” That is not what a nation under attack is to be told. Instead, the American public should have been told not to shop but to fight, and fighting had to entail some kind of self-sacrifice and national enlistment, whether to guard public places or for young adults to join the police, the FBI or the fire department.

Alas, the people were told to feast, and the government showed the way, by cutting taxes even while waging two exorbitant wars. That is why Bush ended his presidency with a record $0.5t. budget deficit and more than $9t. in overall national debt, nearly twice its size before September 11.

Having seen and heard their leaders, the people also borrowed and spent, and households, like the government, sank in debt.
This could all have been avoided had the free world’s leaders not been noblemen like Bush and Greenspan, who did not live among the Americans who were to eke out a living when new economic powers made it impossible for them to manufacture half the world’s industrial output – as their parents did half a century before September 11.

This leadership had no gospel for the American middle class, whose relative income froze since the mid-1970s after having risen 90% in 1948-1974, while the richest 1%’s relative income soared 275% in 1979-2007, as cited in Nadav Eyal’s The Revolt Against Globalization (Hebrew).

A decade on, some delude themselves that Wall Street’s restored vigor means the meltdown’s message has been absorbed and the ailments it exposed have been cured. They weren’t.

The free world’s middle classes and proletariats are even more fearful today than they were a decade ago for their jobs, incomes, savings, cultural identities and social status.

The meltdown that was September 11’s sequel was but a prelude to a social tempest whose blackish clouds – from Brexit through Trump to the resurgence of European populism, xenophobia and neo-fascism – are already lining the horizon.

(First in a three-part series.)


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