The financial crisis that first affected Wall Street and then spread rapidly throughout the world is, in many ways, emblematic of the worst of the corporate-dominated political and economic system that has now been exposed. The barons of Wall Street – clearly the most elite of the banking royalty in the U.S. – had their way with very little government interference and their greed and arrogance almost destroyed our nation’s economy. There are several factors, fed by greed and ultimately corruption that caused this horrific mess.
• Deregulation and non-enforcement: Non-enforcement of rules against predatory lending helped the housing bubble balloon. While some regulators had sought to exert authority over financial derivatives, they were stopped by government — enabling the creation of the credit default swap market. Even Alan Greenspan concedes that that market — worth $55 trillion in what is called notional value —imploded in significant part because it was not regulated.
• Short-term thinking: It was obvious to anyone who cared to look at historical trends that the United States was experiencing a housing bubble. Many in the financial sector seemed to have convinced themselves that there was no bubble. But others must have been more clear-eyed. In any case, all the Wall Street players had an incentive to not pay attention to the bubble. The bosses and lesser players were making stratospheric annual bonuses based on annual results. Even if they were certain the bubble would pop sometime in the future, they had every incentive to keep making money on the upside.
• Financial: Profits in the financial sector were more than 35% of overall U.S. corporate profits in each year from 2005 to 2007, according to data from the Bureau of Economic Analysis. Instead of serving the real economy, the financial sector was actually taking over the real economy. The tail was wagging the dog to put it in the common vernacular. It’s not supposed to work that way.
• Profit over social use: The corporate-driven economy was being driven by what could make a profit, rather than what would serve a social purpose. Although Wall Street “hucksters” offered elaborate rationalizations for why exotic financial derivatives, private equity takeovers of firms, securitization and other so-called financial innovations helped improve economic efficiency, by and large these financial schemes served no socially useful purpose.
• Externalized costs: Worse, the financial schemes didn’t just create money for Wall Street movers and shakers and their investors. They made money at the expense of others. The costs of these schemes were foisted onto workers who lost jobs at firms gutted by private equity operators, unpayable loans acquired by homeowners who bought into a bubble market, and now the public. Unconscionable lending terms became the norm for borrowers.
What is most revealing about the financial meltdown and economic crisis, however, is that it illustrates graphically that corporations — if left to their own worst instincts — will destroy themselves and the system that nurtures them. In addition to the financial sector, neither was the rest of the corporate sector on good behavior during 2008. They can’t be allowed to escape justified scrutiny. If we haven’t learned from what happened to our economy and why it happened, our Nation is likely doomed to a total collapse.
Source: Multinational Monitor
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