Understanding the Economic Collapse
By Larry Johnson on July 3, 2011 at 9:31 PM in Current Affairs
If you want to understand the roots of the 2008 economic collapse start with the book by Bethany McLean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis.
The New York Times Book review offered well deserved praise:
Two of our finest business journalists have written a thorough account of the origins of the financial crisis of 2008. More than offering just a backward look, it helps explain the most troubling business headlines of the moment, as well as those that are certain to come. For starters, there is the unfolding foreclosure-paperwork fiasco. Next up will be a clash over whether big banks should be forced to take back billions of dollars in contaminated mortgages they sold. Down the road, we will no doubt confront the danger of the next asset bubble inflating as a result of the Federal Reserve’s use of extreme monetary policy to stimulate the economy. These continuing and future problems are all symptoms of a larger syndrome whose origins Bethany McLean and Joe Nocera ably chronicle in “All the Devils Are Here: The Hidden History of the Financial Crisis.”
The title alludes to a line in “The Tempest” (“Hell is empty, and all the devils are here”), and fiends surely abound: subprime sleaze kings; bonus-happy Wall Street plutocrats; and, of course, Alan Greenspan, the fallen maestro of the Federal Reserve, whose see-no-evil free-market ideology made a virtue of unchecked financial recklessness.
For those readers who have not immersed themselves in the murky tale of the way dubious housing finance became entangled with Wall Street’s casino culture, McLean and Nocera offer as legible an overview as exists. McLean, a former Goldman Sachs employee, writes for Vanity Fair and was the author, with Peter Elkind, of an insightful book about the Enron scandal called “The Smartest Guys in the Room.” Nocera is a business columnist for The New York Times and, like McLean, a former longtime staff member at Fortune.
This is no hyperbole. Trying to understand the economics of the collapse can be mind boggling.
But McLean and Nocera make it comprehensible and shy away from technocrat economic speak. You will come to a quick conclusion–there is plenty of blame to go around. Republicans and Democrats alike. But there also some heroes. Actually, a heroine to be precise. Brooksley Born. She was profiled in a 2009 Frontline documentary:
In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation’s worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.
“I didn’t know Brooksley Born,” says former SEC Chairman Arthur Levitt, a member of President Clinton’s powerful Working Group on Financial Markets. “I was told that she was irascible, difficult, stubborn, unreasonable.” Levitt explains how the other principals of the Working Group — former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin — convinced him that Born’s attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was “clearly a mistake.”
Born’s battle behind closed doors was epic, Kirk finds. The members of the President’s Working Group vehemently opposed regulation — especially when proposed by a Washington outsider like Born.
“I walk into Brooksley’s office one day; the blood has drained from her face,” says Michael Greenberger, a former top official at the CFTC who worked closely with Born. “She’s hanging up the telephone; she says to me: ‘That was [former Assistant Treasury Secretary] Larry Summers. He says, “You’re going to cause the worst financial crisis since the end of World War II.”… [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.’”
Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. “Born faced a formidable struggle pushing for regulation at a time when the stock market was booming,” Kirk says. “Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves.”
Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.
“It’ll happen again if we don’t take the appropriate steps,” Born warns. “There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.”
Born not only was ignored, she was viciously attacked by Robert Rubin, Larry Summers and Alan Greenspan. After you watch this film you will be enraged by the conduct of those three men in particular. Just awful what they did.
If you have some time this holiday weekend, take time to watch this important program on-line (click here).
by Ronald Scott
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