I especially like the Hollywood movies Ratigan uses to explain what's happened. Former Federal Reserve Chair, Alan Greenspan, is The Godfather. He makes the banking sector an offer they can't refuse: Virtually free money with carte blanche to do what they want. The banks, and other market players (especially the "shadow banking" institutions), take the money and make unrealistically low interest rate loans across the economy.
And why not? The Godfather, Alan Greenspan, had their back. (Paradoxically, in spite of his hands off "free market" beliefs, Greenspan also believed it was his duty to write blank checks and ignore market corrupting practices to keep the market afloat.)
For their part, American consumers thought the money coming in was "all good" and would last forever. Like Doyle Lonnegan in the Robert Redford movie The Sting, American consumers didn't realize that they were getting their pockets picked, and that the ones doing the picking were the people America trusted to take care of their business - Alan Greenspan and Wall Street (a process I wrote about in early 2008).
Like Doyle Lonnegan, the American taxpayer was footing the bill for the con men (Alan Greenspan and Wall Street) to play and make their bets. When the time for making the real big con (bet) arrived, Lonnegan was again tricked out of his money by a first-class sting operation. In many ways, with the
Heads they win, tails we lose.
Still, there's little doubt that America was pleased with the immediate results, and did not worry too much about the future when the game was being played out. And why should they worry? Americans were told over and over again that market players are good, rational people. You can trust Wall Street. Government, on the other hand, was bad. Government regulations were worse. And besides, Wall Street historically returned about 7.5% per year, which would likely go on for eternity (so the argument went).
With this mind-set as America's backdrop, it should come as no surprise that Wall Street's sting operation wasn't such a hard sell. In many respects, we were asking to be fooled.
The end result? Bankers and investors went nuts borrowing and lending, borrowing and lending, borrowing and lending ... well, you get the drill. But it didn't stop there.
The good people on Wall Street took all the newly created debt contracts, repackaged them into high paying securities, and then sold them to pensions and other fund managers. Wall Street effectively marketed them as securities that were as safe as government bonds. With the ratings' agencies and Wall Street financiers working together to make sure the debt looked clean on their computer models, what could possibly go wrong?
Well, we know what went wrong. Because America is chock full of people who have a child-like understanding of how markets work, we got conned. And it's happening again.
Today, no one in Congress seems willing to stand up to get our money back. Part of the reason for this is that they don't understand what the hell is going on either (Republican Ron Paul and Democrat Alan Grayson excluded). Worse, those who helped pull off this scam are too gutless to accept blame because of what it would do to their egos, and their bank accounts. Recent regrets from CEOs, without assuming responsibility, are simply public grandstanding.
As a result, it should come as no surprise that the pieces of legislation making their way through Congress are left lacking (though Audit the Fed is promising).
At the end of the day I don't expect much out of the reform efforts (which can be tracked here). Americans are woefully ignorant about too much of this stuff to push for anything of substance. Our Congress is too dependent on Wall Street lobbyist campaign contributions to stand up for the American consumer. Worse, most Americans - especially the market sycophants in Congress - have bought into a free market mantra that is more fairytopian than grounded in reality. This explains why accountability is missing from our current debate.
Simply put, because the vast majority of Americans still believe in self-regulating markets they don't understand where to begin when it comes understanding the market failure we just experienced (hint, it's not just Fannie Mae or Freddie Mac).
When it comes to understanding how modern markets work we really need to ask whether America has become a nation of ignorant wretches. If we are honest with ourselves I have to believe that the solutions would have become obvious by now ... which, in my view, explains why we're going to do 2008 all over again.
Stay tuned.
- Mark
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