Wall Street and the cost of forgetting
Wall Street wants America to forget September 15, 2008.
That’s because outside events of violence, few dates have signified more calamity than this fateful day. On that black Monday, Lehman Brothers Holdings Inc. declared bankruptcy. This legal action revealed the rotten core of the world’s financial industry. Reckless mortgage lending motivated by the bonus-driven securitization business left Americans with $700 billion in collective mortgage debt beyond the lost market value of their homes. Consumers swamped by this debt cut other spending, factories were closed and layoffs were forced, leading to still less consumer spending– a vicious cycle that became the Great Recession.
Congressional and White House investigations, books, movies and even songs have explored the financial crash of 2008 and the resulting economic mayhem. The latest damage tally comes from Better Markets: $12.8 trillion lost in estimated actual and avoided GDP, 26 million lost Americans jobs, $19 trillion lost in household wealth. For context, if you received $100,000 every second of every hour of every day, it would take three years to amass $1 trillion.
Less quantifiable are the darkened futures of college graduates, eviscerated philanthropies less able to fund worthy efforts such as finding climate change solutions, or the spike in incidences of mental illness.
Wall Street wants America to forget September 15, 2008, because its captains and lieutenants earn billions in personal lucre from the risky, speculative and intentionally complex financial activities that led to the crash. Brilliant minds have replaced the 3-5-3 bankers (pay depositors 3 percent, loan at 5 percent and hit the golf course at 3 p.m.) And these Wall Street wizards have made credit more expensive and dangerous under the misrepresentation of “innovation.” Four years after its Chapter 11 filing, the absurd complexity of Lehman’s dealings, with 150,000 open derivatives transactions at the time of bankruptcy, laid bare the casino nature of the nation’s fourth largest investment bank.
Wall Street apologists tell another story about the cause of the crash: Un-creditworthy home buyers lied on their loan applications, securing funds that both inflated housing prices generally and which they couldn’t pay back except by flipping into an ever escalating market. Really? Low-wage workers snuck $700 billion by the brightest minds of Wall Street?
On top of this self-serving fantasy, Wall Street proffers an even bolder fairy tale about the burden of the critical Wall Street reforms passed into law in 2010. Industry’s congressional friends claim that the Dodd-Frank Wall Street Reform and Consumer Protection Act discourages lenders from loaning to worthy businesses. That means they can’t hire workers, prolonging our economic malaise. Really? What about those consumers buried in mortgage debt and unable to buy what business is selling?
Another new report from the International Monetary Fund and co-authored by Brookings Institute scholar Douglas Elliot drives a stake through this zombie argument. The new Dodd-Frank law will increase lending rates by an amount as small as the smallest adjustment made in Federal Reserve lending rates. Dwell on this: The cost of preventing another $20 trillion-$40 trillion financial crash can be financed with the smallest of decreases in Federal Reserve lending rates.
Remember September 15, 2008, and the regulations we need put in place to protect us from a recurrence. Your job, your retirement savings, even your psyche may depend on it.
Bartlett Naylor is Public Citizen’s financial policy advocate. Follow him on Twitter @BartNaylor