The Financial crisis of Sept 2008

"Free market capitalism" is supposed to be the best path to prosperity. I guess our current financial crisis is simply an anomaly, a brief and temporary correction. I’m sure it comes to no one’s surprise that our economy only practices free market discipline for the poor and middle classes, and socialism for the rich. Wealth is more concentrated today in the hands of the wealthiest 1% of Americans, than at any other period of our nation’s history.

This financial crisis is over thirty years in the making. It is no accident that today the financial sector (including finance, insurance, and real estate) accounts for 20% of our nation’s GDP, while manufacturing currently accounts for only 12%. The history behind this fact is very revealing about our current financial crisis. Sometime in the late 1970s and throughout the 1980s, our “enlightened” government officials anointed the financial sector sacred at the expense of other sectors of our economy, in particular manufacturing. Over the course of these past thirty years, the government has come to the aid of finance time and time again with hundreds of billions of dollars of “bailouts.” Currently, 40% of all corporate profits derive from the financial sector, and only 10% from manufacturing. It’s important to note, that the wealth generated by finance is highly concentrated in the hands of the top of the American economic scale, while workers potentially see more of a “trickle down” from the wealth generated by industry. This should explain why the government rushes to the rescue of finance, while allowing manufacturing to wither away.

There is a ton of money to be made from workers who earn little and spend a lot. As manufacturing shrinks, so does the salary of American workers. Debt enabled the financial sector to balloon to 20% of our nation’s GDP and dominate our economy. The financial sector has grown so rapidly these past thirty years because of debt. In the 1950s, the private and public debt of America was about $5 trillion. In the mid-1980s, the private and public debt of America was about $10 trillion. In 2006, private debt in America was about $43 trillion. This is the party that finance has been bingeing on over the past thirty years. In 2007, the private and public debt of America was three times the GDP. This ratio is higher than the worse years of the Great Depression.

The financial sector has reaped great profits at the expense of Americans and our nation’s economic future. The mortgage crisis has exposed the corrupt and destructive practices of the financial sector. The Americans that are losing their homes to foreclosures today are the victims, not the causes of our financial crisis. Finance has packaged billions of dollars of mortgages together in CDOs (collateralized debt obligations). These CDOs have generated enormous amounts of wealth for the financial sector. Finance purposely gave out loans to unqualified burrowers who had no incomes, no jobs, and no assets. This practice was known as providing “ninja” loans. It is estimated that there is currently $500 billion of “ninja” loans circulating in our financial sector today. Finance routinely packaged “sound” loans with “ninja” loans and sold them off as CDOs to large domestic banks like Freddie and Fannie, as well as to foreign financial institutions. As a result, Americans were preyed upon by finance in order to make huge profits.

What does this mean for Americans and America? You be the judge… Should we continue to allow our economy to function in this manner, or should we find alternatives that correct the destruction caused by the financial sector in these past thirty years?

* Please check the facts I have posted above. The information I cite here comes from: Phillips, Kevin. Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. New York: Penguin Group, 2008. This is a great book. Please get a copy and read it. I welcome any and all comments. I look forward to future conversations and productive debates.