The Famous Final Scene: Financialism and The People

Bankers and their conservative apologists don’t seem to understand why The People Don’t Love Them Anymore?  Some of the resulting punditry has the ring of the Famous Final Scene — “Does this mean we’re really breaking up?”  Could be, and if so there are some elements which explain the situation.

“You don’t listen to me any more.”  Mortgage foreclosure activity is rising again after a brief hiatus, and Nevada continues to lead the nation in this unfortunate category.  “Nevada had the country’s highest foreclosure rate last quarter, with one in every 44 homes with a foreclosure filing. While foreclosures in Nevada decreased from the second quarter, default notices jumped more than 15 percent.”  [Reuters]

No, the over-heated Housing Bubble and subsequent financial collapse wasn’t the result of those irresponsible ‘little people’ who took on more mortgage than they could afford.  Blaming the victims, who fell for the mortgage bankers’ siren songs, who believed the mortgage bankers when they were told they qualified for a mortgage, and were often horrified to discover esoteric terms that caused their mortgage payments to skyrocket, isn’t the explanation.

No, blaming the mortgage twins, Fannie Mae and Freddie Mac, isn’t the answer either.  Fannie Mae was privatized in 1968, complete with shareholders and profit/loss statements.  Freddie Mac went public in 1989.  Not that these two institutions covered themselves in glory — by January 2007, “According to a report by the Office of Federal Housing Enterprise Oversight (OFHEO), at the end of 2007 Fannie Mae and Freddie Mac own $267 billion in mortgage-backed securities issued by other firms.” [SPL]

On September 7, 2008 Fannie Mae and Freddie Mac are placed in a conservatorship, “to be managed by the Federal Housing Finance Agency. The estimated cost of the rescue is unknown, but analysts say it potentially could put taxpayers at risk of paying billions of dollars if the state of the U.S. housing market fails to improve. The CEOs of both companies, Daniel Mudd of Fannie Mae and Freddie Mac’s Richard Styon, are relieved of their jobs and expected to receive a combined executive payout package of between $10 million to $19 million.” [SPL]

The “government made me do it” argument doesn’t wash because the Mortgage Twins were behaving — not like a government entity exercising responsible oversight — but more like their non-GSE cousins in the private sector, anxious to get further into the highly profitable securitization game.

Well then, the Community Reinvestment Act requirements “must” have caused the banks to make too many subprime loans?  No.  The facts are otherwise: “50% of subprime loans were made by mortgage service companies not subject [to] comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations.”  [BusinessWeek] And, “Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley.”  [BusinessWeek]

Perhaps now the average American victim of the credit meltdown, whose tax dollars were used to guarantee the solvency of the American bankers, are tired of being scapegoats?  Members of the financial sector, whose avarice engendered the over-heated housing bubble, cry “Irresponsible Borrowers, Mortgage Twins, Community Reinvestment Act” in a manner analogous to the practice of putting one’s fingers in one’s ears and repeating “La, La, La, La I Can’t Hear You.”  {stage directions: “door slams, sound of car leaving driveway}

“Mother said you were shiftless.”  There’s nothing a disreputable person loves more than to remain unsupervised.   Likewise, there is nothing an ethically challenged group loves more than deregulation.   Why else would banks revise their charters to place themselves under the eyes of those government agencies most willing to look the other way?  [DB] [NRP] [TBS] And yet the banking corporations and their supporters continue to prescribe deregulation as the way to protect American taxpayers, account holders, and consumers.

Before Congressional investigators the Wall Street barons proclaimed their patriotism and devotion to American “ethics and values,” back in their corporate offices they reinforced the notion that any “market” was ethical as long as there were two willing partners to the transaction — even if one was being sold a pig in a poke — even if the investment bank was betting against its own deal. [Bloomberg] [NYT]   Brooksley Born, former head of the CFTC tried to warn us about the deregulation of credit default swaps before most people had even heard the term, she was rewarded for her prescience by being replaced, and later labeled a Cassandra. [WaPo] [PBS] {stage directions:  two adversaries sit in tense silence across the room…}

“How can you keep running up these bills?”  Corollary to ” You promised you’d stop…”  If we were thinking that the popularity of credit default swaps might have declined in the wake of the housing bubble collapse, consider their use as European economies struggle.  [Bloomberg] As for the infamous CDO’s — some settlements have been agreed upon, but Morgan Stanley was exonerated from charges of defrauding a government pension fund (Libertas Case) because the offerers, not Morgan Stanley, prepared the statements. [Reuters] {stage directions: A throws pile of paperwork at B}

“You expect everyone else to clean up your messes.”  One such mess is “financialism.”

“Over the last 25 years American capitalism has become financialism, which is primarily transactional, unrestrained greed. Financialism embraces the view that the only purpose of business is to create shareholder value, measured primarily by short-term results. The dominance of short-termism is evidenced by the magnitude of institutional stock “renting” for terms of 12 months or less, the volume of high-speed, high-frequency algorithmic short-term trading, the short average tenures of chief executive officers and the dominance of executive compensation tied solely to short-term results.”  [Forbes]

And, this is a truly large mess, something Adam Smith never contemplated.  Financialism distorts capitalism and creates middle class income stagnation, income disparity, off shoring jobs, diminished manufacturing capability, and equity market volatility.   It is the financial equivalent of being “excused” for leaving dirty clothing, empty pizza boxes, half-empty pop cans, and dirty tableware scattered about because “I’m busy.”  It is to trade short term profitability for long term stability.   If it’s messy, so be it, the “taxpayers” will clean up after us.   {stage directions: clothing, pizza boxes, pop cans hurled against wall to make a pile on the floor}

I’m keeping the house…  little wonder people from all walks of life have decided to “occupy” the symbol of the selectively deaf, irresponsible, intractable, and self centered Financialist Universe, Wall Street.  The old excuses (the government made me do it), the tired call for even less supervision, the interminable trading for the sake of making trades,  and the unwillingness to even consider cleaning up the resulting messes, have pushed Americans about as far as conceivable into an adversarial relationship with what should have been one of their essential financial utilities.  Is it surprising those people are beginning to speak of d-i-v-o-r-c-e?

More reading and recommendations:

On financialism and its effects – “The Business Revolution that’s destroying the American Dream,” Hess, Forbes, 2/24/11.  “Occupy Wall Street: Some Thoughts on an Agenda,” Armistead, Seeking Alpha, 10/17/11.  “Jungle Ethics Financialism vs. Free Market Capitalism, Seeking Alpha, 6/8/09.

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