financial
meltdown
Causes and
potential solutions
"blind
men and the elephant"- each sees one dimension more clearly than others.
case study in
public opinion formation
How it fits into
class:
Complicated
issue which affects everyone locally and has global effects
-consequences
are very serious
-multi-faceted
-public looks to
government to resolve it
-how it is
resolved not only shapes relationship between government and
economy, but supports different ideological solutions & positions
A. Lack of
Government regulation
scenario:
Greed
and Stupidity
The
Inside Story on the Breakdown of the SEC
One
Bad Bond
1. repeal of the
Glass-Steagall Act 1933
-allowed banks to invest monies into mortgage-backed
securities (1999)
2. bad accounting practices allowed to exist (lack of transparency)
3. belief that voluntary regulation would work
a. no limits on investment in financial derivatives
b. banks got seriously over-extended
c. federal preemption of state consumer protection laws
4. predatory lending allowed
5. globalization and expansion of industry
1.de-regulation of the industry at a time when it was becoming more
complex & less transparent
2.-serious shortage of FBI agents investigating fraud
3. under-staffed SEC, -failure to investigate "ponzi
schemes", & numbers that looked too good to be true
6. the solution requires restoring old regulatory framework and
imposing new ones on new financial arrangements
B.individual
failure to understand risk & govt unwillingness to
impose sound fiscal policies scenario
NYTimes 2003
New Agency Proposed
Dear AIG, I quit.
1. began with
sub-prime mortgages & ppl taking out loans they could
not pay back
2. efforts to
regulate Fannie Mae and Freddie Mac were stopped
3.house values
were over-inflated, so need for market adjustment
a. many wise investors chose not to buy beyond what
they could afford
b. over-supply of houses on market, lowers prices
for all homes
c. loss of equity for everyone
4. global
impacts since banks carrying loans became expanded into
pyramid scheme
5. biggest
injustice is to make wise investors bail out those who made
bad choices
a.
consumers will have to deal
b.
irresponsible banks will also have to go under, if necessary
6. market
discipline should prevail
a. govt's
job is to impose honesty, transparency, fair treatment
for all industries alike
1. penalties for 'bad actors'
2. no further imposition on those who chose
wisely
7. we need to be sure solution is not going to create bigger problem by
shutting all innovation down
a. govt already showing signs of overreaching, ex. firing of GM
ceo, Wagoner
1. unprecedented for govt to play this
role
2. should have been done by board
b. when govt interferes, equal treatment of all disappears,
giving some advantage
1. banks vs auto industry
2. some wall street firms bailed out,
but not all (arbitrary)
c. no institution should be too big too fail
1. w/ risk can come big pay-out or
big failure
2. those who make good decisions
should benefit, others fail because of poor judgment
C.
Insider collusion between
government regulators and financial industry officials scenario
PBS,
Moyers interview w/ William Black vid
-
1.comparison between S&L scandals of 1970's (Keating
5) and today
a. tighter regulation in 1970's
than now
b. fewer investigators
2.
decision on which wall street industry to save based on
personal ties, not financial logic
a. Lehman Brothers allowed to fail,
Goldman -Sachs saved
b. reflection of close ties between
Henry Paulson & Tim Geitner
3. Black's
conclusion- Obama administration same as Bush administration
a. insiders are running the show
b.
foxes are guarding henhouse
4. those making the decisions don't want real reform
a. they benefit from the current system
b. don't want the public to know the scope of problem
c. protecting their friends, though clearly, conflict of
interest
5. wall street and banking industry contribute money to campaigns of
current politicians
a. money and power are influencing political decisions
b. both dems and reps are complicit in the creation of the
current system & cover-up
D.
media failure
1. Amy
Goodman, Bill Moyers, Jon Stewart
a. important questions never asked
"Why bail out the banks and not the auto
industry?"
b.
why not offer more relief for homeowners?
c.
Would the european model work in the US?
d.
why is the govt buying toxic assets at inflated prices?
PUBLIC
RESPONSE:
Feeling too Down to
Rise up
A.
populist anger, looking for target
B.
no clear answer on what is most practical solution
C.
ppl fall back on ideology & listen to who they trust
1. each focuses on a piece
of the problem, ignores the rest
2. niched into ideological
camps, no possibility of consensus
Does this serve
democracy?
What have we
learned from this?
How will we make sense of this so we know not to let it happen again?