Posted by Kevin Villani on February 11th, 2016 (All posts by Kevin Villani)
Long time Democrat turned Republican Donald Trump, who as a business titan relied more than any of his opponents on “Wall Street” funding, decisively won the Republican primary. In sharp contrast, socialist Bernie Sanders decisively won the New Hampshire Democrat primary by attacking his opponent’s Wall Street ties. Trump supporters apparently believe that the way to deal with Wall Street a**holes is a bigger a**hole who will negotiate much better deals, whereas Sanders supporters believe that “Wall Street (a synonym for the entire US financial system) is a fraud” requiring major extractive surgery.
Most people within the NY financial community including the numerous mid-town asset management firms agree that many Wall Street players were a**holes during the sub-prime lending debacle leading to the 2008 financial crisis, but surely the Sanders pitchfork brigade wouldn’t travel uptown. This may explain why among the thousands of books and articles written in the aftermath of the financial crisis and the Occupy Wall Street movement, Wall Street hasn’t defended itself and has found few defenders willing to go public.
Truth be told, Wall Street has always attracted more than its share of greedy a**holes. But historically they discriminated against the less profitable investments in favor of those that had the highest return potential relative to risk. This represented the brains of a heartless US capitalist system. Defenders of capitalism correctly argue that it is the only economic system at the base of all human economic progress, however unequally distributed. Progressive critics argue for greater equality, the poor made poorer so long as the better off are equally so (although this is not the way it is typically represented).
Political arguments over who gets to allocate capital predate the US Constitution. US crony capitalism has bankrupted many states and banks, making the US system historically the most fragile among industrialized countries. The financial system that crashed in 2008 was the culmination of progressive interventions dating to the Hoover and FDR Administrations. Progressives played to three large political constituencies; cheap readily available credit for some borrowers, market returns without the risk for savers and no cost to taxpayers.
This nirvana is obviously impossible to achieve, and taxpayers were the easiest to fool. Banks that historically leveraged 50% and investment banks that hardly used any leverage by the early part of the last decade were leveraged twenty to one and thirty to one respectively, and by the time of the financial crisis both employed almost infinite leverage. What drove financial firms to these limits was the double taxation of equity but not debt, a “taxpayer subsidy” amounting to tens of billions annually. What enabled it was the virtually universal taxpayer backing of cheap debt (deposits) of the former and the Too-Big-Too-Fail regulatory support of the latter that kept debt costs repressed.
It doesn’t require the benefit of hindsight to realize that people with little income and little or no wealth weren’t good candidates for home loans, but so long as politicians and their regulators made it profitable and politically rewarding, Wall Street a**holes were only too willing to participate in the sub-prime lending debacle. At the time politicians and regulators focused more of their ire at those “Wall Street speculators” who, using derivatives, tried to burst this populist lending bubble.
The sub-prime lending debacle created a $6 trillion solvency hole in global financial institutions. In spite of the bailouts lead by Federal Reserve Chairman Bernanke and Treasury Secretary Geithner and the Dodd-Frank Act named after Senator Chris Dodd and Congressman Barney Frank – all of whom were implicated in bubble finance – and seven years of ZIRP this remains largely unresolved, and the global bubble in public debt to re-inflate the bubble has created a global bad debt solvency hole orders of magnitude greater.
Rather than repent, politicians, regulators and Wall Street mostly moved on to auto and student loans. Trump’s crony capitalism will likely favor business cronies whereas Hillary Clinton’s is an extension of husband Bill’s. Sanders’s socialist alternative will accelerate the eventual inevitable financial collapse.
Politicians will once again claim “nobody could have seen this coming” and blame “Wall Street.” This time “Main Street” will demand flesh and blood scapegoats.
Author of Occupy Pennsylvania Avenue