To sum up, we live in a world where economic growth is generally seen as both beneficent and necessary — the more, the better; where past growth has brought us to a perilous state environmentally; where we are poised for unprecedented increments in growth; where this growth is proceeding with wildly wrong market signals, including prices that do not incorporate environmental costs or reflect the needs of future generations; where a failed politics has not meaningfully corrected the market’s obliviousness to environmental needs; where economies are routinely deploying technology that was created in an environmentally unaware era; where there is no hidden hand or inherent mechanism adequate to correct the destructive tendencies. So, right now, one can only conclude that growth is the enemy of environment. Economy and environment remain in collision.5
After examining the abuses of corporate power, Speth endorses the call to revoke the charters of corporations that grossly violate the public interest, and to exclude or expel unwanted corporations, roll back limited liability, eliminate corporate personhood, bar corporations from making political contributions, and limit corporate lobbying.
Health and Happiness
Speth is clear that we are unlikely as a species to implement the measures required to bring ourselves into balance with the environment so long as economic growth remains an overriding policy priority, consumerism defines our cultural values, and the excesses of corporate behavior are unconstrained by fairly enforced rules. To correct our misplaced priorities, he recommends replacing financial indicators of economic performance, such as GDP, with wholly new measures based on nonfinancial indicators of social and environmental health — the things we should be optimizing. Speth quotes psychologist David Myers, whose essay “What Is the Good Life?” claims that Americans have
big houses and broken homes, high incomes and low morale, secured rights and diminished civility. We were excelling at making a living but too often failing at making a life. We celebrated our prosperity but yearned for purpose. We cherished our freedoms but longed for connection. In an age of plenty, we were feeling spiritual hunger. These facts of life lead us to a startling conclusion: Our becoming better off materially has not made us better off psychologically.6
This is consistent with studies finding that beyond a basic threshold, equity and community are far more important determinants of health and happiness than income or possessions. Indeed, as Speth documents, economic growth tends to be associated with increases in individualism, social fragmentation, inequality, depression, and even impaired physical health.
Social Movements
Speth gives significant attention to social movements grounded in an awakening spiritual consciousness, which are creating communities of the future from the bottom up, practicing participatory democracy, and demanding changes in the rules of the game.
Many of our deepest thinkers and many of those most familiar with the scale of the challenges we face have concluded that the transitions required can be achieved only in the context of what I will call the rise of a new consciousness. For some, it is a spiritual awakening — a transformation of the human heart. For others it is a more intellectual process of coming to see the world anew and deeply embracing the emerging ethic of the environment and the old ethic of what it means to love thy neighbor as thyself.7
By this time, given the strength of the evidence to the contrary, it is difficult to take seriously anyone who assumes, without question, that the global economy can expand to seven times its current size between now and 2050 without collapsing Earth’s life support system. Unfortunately, Jeffrey Sachs demonstrates the intellectual myopia common to many professional economists whose ideological assumptions trump reality.
When we seek guidance on dealing with the complex issues relating to interactions between human economies and the planetary ecosystems in which they are embedded, we are best advised to turn to those like James Gustave Speth, who view the world through a larger and less ideologically clouded lens — and who, not incidentally, recognize the distinction between real wealth and phantom wealth.
It is instructive, however, that not even Speth addressed what has become the elephant in the middle of the room — one that had not yet moved to the forefront of the public consciousness at the time he and Sachs were writing their respective books. The elephant — an out-of-control and outof-touch financial system devoted to speculation, inflating financial bubbles, stripping corporate assets, and predatory lending — was dramatically exposed by the credit collapse. Though costly, the collapse thus has been something of a blessing. It has brought into sharp relief previously obscure but crucial system design choices relating to our financial institutions that we otherwise might not have recognized until they had done so much damage to the economy, our communities, and the environment that recovery would not be possible.
PART II
THE CASE FOR REPLACING WALL STREET
Efforts to fix Wall Street miss an important point. It can’t be fixed. It is corrupt beyond repair, and we cannot afford it. Moreover, because the essential functions it does perform are served better in less costly ways, we do not need it.
Wall Street’s only business purpose is to enrich its own major players, a bunch of buccaneers and privateers who find it more profitable to expropriate the wealth of others than to find honest jobs producing goods and services beneficial to their communities. They walk away with their fees, commissions, and bonus packages and leave it to others to pick up the costs of federal bailouts, gyrating economic cycles, collapsing environmental systems, broken families, shattered communities, and the export of jobs along with the manufacturing, technology, and research capacities that go with them.
Even more damaging in some ways than the economic costs are the spiritual and psychological costs of a Wall Street culture that celebrates greed, favors the emotionally and morally challenged with outsized compensation packages, and denies the human capacity for cooperation and sharing. Running out of control and delinked from reality, Wall Street has created an Alice in Wonderland phantom-wealth world in which prospective financial claims and the expectations that go with them exceed the value of all the world’s real wealth by orders of magnitude.
We can no longer afford to acquiesce to a system of rule by those engaged in the pursuit of phantom wealth far beyond any conceivable need — and to no evident end other than to accumulate points in a contest for the top spots on the Forbes list of richest people.
Chapter 5, “What Wall Street Really Wants,” explains why there is no limit to Wall Street greed and how its institutions use the economic and political muscle of their monopoly control of the creation and allocation of money to get what they want: Everything!
Chapter 6, “Buccaneers and Privateers,” provides an evocative history of the role that licensed pirates and chartered corporations played in the transition from rule by kings — who found them a cheap substitute for official navies and a useful means of circumventing parliamentary oversight — to rule by global financiers.
Chapter 7, “The High Cost of Phantom Wealth,” describes how Wall Street players reap enormous financial rewards for creating phantom expectations through their use of complex financial instruments that defy understanding.
Chapter 8, “The End of Empire,” describes Wall Street’s rule by the power of money as an extension of five thousand years of imperial rule by kings and emperors who wielded the power of the sword.
Chapter 9, “Greed Is Not a Virtue; Sharing Is Not a Sin,” looks at what events since the September 2008 crash reveal about the profound ethical issues before us and the inability of Wall Street to face up to its culpability and play a constructive role in a search for real solutions.
CHAPTER 5
WHAT WALL STREET REALLY WANTS
The Bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough money to buy it back again.
ATTRIBUTED TO SIR JOSIAH STAMP, DIRECTOR, BANK OF ENG
LAND 1928–1941
The Wall Street money game is a power game as old as empire. And like Monopoly, the popular board game, the game isn’t over until the winner has it all. So what does Wall Street want? Everything. And the crash of 2008 did nothing to diminish that drive.
The basic question is whether our institutions should be designed to meet the needs of all or to facilitate the Wall Street drive to get it all. Wall Street’s answer is clear.
TWO GREAT ARCS
The Nobel Prize–winning economist Paul Krugman opens The Conscience of a Liberal with a personal reflection on growing up during the post–World War II years believing that a bipartisan political consensus framed by the New Deal of the Roosevelt administration was what America is about. Only when the New Deal consensus fell apart did he begin to see the deeper truth.
There have been two great arcs in modern American history — an economic arc from high inequality to relative equality and a political arc from extreme polarization to bipartisanship and back again. These two arcs move in parallel: The golden age of economic equality roughly corresponded to the golden age of political bipartisanship.1
These arcs, by Krugman’s reckoning, are creations of intentional political action. The middle class was created in the space of a very few years through New Deal legislation that established Social Security and other safety-net programs, implemented a highly progressive taxation of income and estates, supported unions, and raised the floor on wages to narrow the wealth and income gap between the upper and lower economic classes.
* * *
HOW WALL STREET SEES ITSELF
We, the Wall Street money managers, are society’s most valuable citizens. We provide capital, manage risk, maintain liquidity in capital markets, and assure the efficient allocation of investment resources needed to create jobs, support innovation, and grow the economy. We are entitled to the fruits of the wealth we create, for as we make our deals, the wealth pie expands, the benefits trickle down, and the lives of all improve.
We fulfill our moral duty to God and country by maximizing individual financial gain, thereby maximizing the pool of wealth available to all. Those who sacrifice a margin of financial gain for a supposed higher good deprive society of the growth in wealth it might otherwise enjoy, and they thereby engage in an immoral act.
Individualism is the foundation of prosperity and liberty. Government is the enemy of both.
* * *
Once in place, this legislative framework was maintained for a time by a new social consensus. Eventually, however, the legislative framework of the midcentury was reversed by the intentional actions of an alliance of corporate CEOs, religious fundamentalists, antitax libertarians, and neocon militarists. Krugman concludes that market forces did not create the middle class and will not restore it.
“MODERNIZING” THE ECONOMY
They began mobilizing in the 1970s and launched a political takeover during the 1980s under the banner of the Reagan revolution.
Wall Street corporate interests provided the money and largely controlled the real agenda. The religious fundamentalists provided the votes in return for lip service to a conservative social agenda on abortion, family planning, and gay marriage. The libertarians provided the ideological framework. The neocons provided justification for outsized military expenditures that swelled the profits of the defense industry and secured corporate access to resources and markets. The alliance played up cultural and racial divisions to fragment opposition and divert attention from the real agenda of the moneyed interests, which was to roll back the New Deal restraints on the concentration of economic power and reclaim the power and privilege they had enjoyed during the earlier Gilded Age.
Once in power, the Reagan administration ended robust antitrust enforcement in the United States. This unleashed a flood of corporate mergers and acquisitions in a consolidation of Wall Street power. Between 1980 and 2005, there were some 11,500 bank mergers in the United States, an average of 442 per year. To give the remaining banks greater power, capital ratios were reduced to give them greater lending capacity.2 As the banking system consolidated, its focus shifted from providing financial services for productive activity on Main Street to funding speculation on Wall Street. Banks called it “financial innovation.”
Rolling Back New Deal Reforms
Basic derivative securities are not new and can provide a useful service. For example, commodity futures are a form of derivative that, when properly regulated, can help both farmers and food processors reduce risk by locking in prices before a harvest. In the 1990s, ever more complex and exotic derivatives of ever less utility to the real-wealth economy began to proliferate.
During the Clinton administration, the Commodity Futures Trading Commission initiated modest regulatory measures. It was blocked, however, by Treasury Secretary Robert Rubin, Deputy Treasury Secretary Larry Summers, and Federal Reserve chair Alan Greenspan on the ground that the market can regulate itself and any such action would stifle financial innovation. In 2000, Senator Phil Gramm pushed through legislation that prohibited the regulation of derivatives.
An explosive growth of derivatives followed, resulting in the complex entanglement of Wall Street institutions that created the systemic risk that ultimately threatened the entire global economy and forced massive public bailouts. Most derivatives trades served no purpose other than generating commissions and speculative profits.
As the attention of the larger banks turned to the easy and profitable business of financing the derivatives markets, their interest in Main Street was reduced to extracting as much money as possible to put into play in the global casino. Because the derivatives shifted the risk to others, and the primary interest of the bankers was to maximize their bonuses, the ability of those to whom they were peddling mortgages and consumer debt to repay them was immaterial.
In 2004, at the urging of Goldman Sachs and other big investment banks, the established requirement that investment banks maintain a 12-to-1 leverage ratio of debt to equity was repealed, leaving them free to make much greater use of borrowed money. At the time, Goldman Sachs was headed by Hank Paulson, who went on to become secretary of the treasury under George W. Bush.
In 1995, soon after he was appointed treasury secretary by President Clinton, Robert Rubin recommended to Congress that it “modernize” the country’s financial system by repealing the Glass-Steagall Act, a Depression-era law that mandated the separation of commercial banking and investment banking.3 Before he joined the Clinton administration as assistant to the president for economic policy and director of the National Economic Council, Rubin was cochair of Goldman Sachs. Rubin’s recommendation received strong support from Allan Greenspan and from Larry Summers, who was then Rubin’s deputy and eventual successor at Treasury.
On April 6, 1998, Citicorp (the parent of Citibank) announced a merger with Travelers, the world’s largest financial services company. It was the largest corporate merger in history and exactly the kind of merger that Glass- Steagall was intended to prevent. Indeed, the merger was arguably illegal. Citicorp and Travelers launched an intensive campaign to repeal Glass-Steagall with the support of Treasury Secretary Rubin. The Fed, chaired by free market fundamentalist Alan Greenspan, had been systematically eroding Glass-Steagall compliance and on September 23, 1998, approved the merger to form Citigroup.4
Rubin resigned from his Treasury post on July 2, 1999, and soon thereafter joined Citigroup as a board member and high-level adviser. The repeal of Glass-Steagall was signed into law by President Clinton on November 12, 1999. Rubin reportedly received more than $126 million in cash and stock during his eight-year tenure at Citigroup.5 This is an iconic example of the revolving door that links the interests and players in a Wall Street–Washington axis of corruption.
The election of 2008 brought to power a young, brilliant, and dynamic new president who embodies the diversity and global perspective that must define the twenty-first century and made the Democratic Party the majority in the Co
ngress. Yet the Wall Street agenda continues to prevail for an all too evident reason.
According to the Center for Responsive Politics, Goldman Sachs staff donated nearly $4.5 million dollars to the Democratic Party in the run-up to the 2008 election. As a group, they contributed nearly $1 million of that to Barack Obama. That made them Obama’s largest private contributor and the biggest business donor to the Democrats in 2008. The sums involved are a pittance in the world of Wall Street, but politicians do pay attention to their largest donors, and Goldman Sachs is only one of many Wall Street players who recognize that giving a few million dollars to Washington politicians can be a highly profitable investment.
It is common for Wall Street players to defend their outrageous actions with a claim that everything they do is legal. That doesn’t mean much when you have such power to change the rules. The crucial difference between ordinary street crime and Wall Street crime is that those who commit street crimes rarely have the means to change the laws they find inconvenient.
Making Finance the Dominant Sector
Certainly, rolling back the policies and gains of the Roosevelt New Deal was a central agenda item for the right-wing coalition. At least equally important was the effort of its Wall Street wing and captive regulators — the Federal Reserve and the U.S. Treasury Department — to restructure the U.S. economy in the name of modernization. Their goal was to make finance the economy’s dominant and most profitable sector — and they were stunningly successful.
Agenda for a New Economy Page 7