Page 2 of 2 'New normal' will be a painful place By Julian Delasantellis
You can see it all around you. The empty lot which yesterday held a car
dealership; the cars have been seized, and, when they are sold away at auction,
will disappear from the debt load. The credit-card limit cutbacks. The
defaulted-on mortgages which are not being replaced by new mortgages written to
prospective borrowers - slowly, like the retreat of a mammoth glacier at an ice
age's conclusion, the debt mountain, built up over 20-plus years of incredible
fiscal profligacy and licentiousness, melts away.
Of course, the next question is obvious. How much more blood will the monster
demand?
Many Americans still with jobs seem to be coping with the crisis much along the
lines of what they've heard from their grandparents
regarding life during the Great Depression and World War II. Yes, there was
hardship and privation, and grandpa sailed around somewhere in a navy uniform
while granny put down her apron to work in a factory with her best friend Rosie
Ripperton; but it all ended quickly, and soon the post-war prosperity that US
baby boomers felt their due birthright commenced.
As applied to the current crisis, this belief implies that the glory days of
easy money, from the 2004 US Securities and Exchange Commission decision that
boosted leverage limits for US investment banks to the top of the real estate
market late in 2006, will be back soon - a little bit of belt tightening, of
purchasing and suffering through the store-brand vegetables rather than the
name brands, and everything will be all right.
There is virtually no evidence that this is, or even will be, the case in the
near term. Indeed, with virtually all of the short-term money markets
nationalized, businesses are still being starved for credit and real-estate
prices are still falling. No matter how much virgin blood the diabolical
Goldman partners are lapping up in their dark covens underneath Water Street in
lower Manhattan, the US, and much of the world economy, continues to
exsanguinate capital like a coke-addled US yuppie getting gored on the streets
of Barcelona. The "new normal" is not here yet. It's somewhere else, and even
if we're still only "reverting to the mean", it will be a much more painful
place.
But perhaps most importantly, are there any real indications that American
society and its economy are ready to start treating the granting of credit more
responsibly? Not many, probably not any. I've already written about the Barack
Obama administration's caving to popular desire over prudent banking as regards
the valuation of mortgage-backed securities (see
Bankers get a model rush, Asia Times Online, April 9, 2009), and the
pressure real-estate interests are putting on Congress to return to the phony
individual house appraisals of the boom (see
Cheating still beats real work, Asia Times Online, July 2, 2009).
In January 1933, the United States Senate's Committee on Banking and Currency
hired one Ferdinand Pecora, an assistant district attorney from New York, to
write the final draft of the committee's report on the causes of the Great
Depression. Pecora asked for and was granted permission to hold extra rounds of
highly publicized hearings; his enterprise has come to be known as the Pecora
Commission.
During Pecora's phase of the investigation, the emotional mea culpas proffered
by many of Wall Street's pre-1929 elite were riveting fair on the radios and
movie newsreels of the time, and the hearing transcripts of the Pecora
Commission are still one of the most important primary sources of research into
the 1929 Great Crash and subsequent Great Depression.
The recommendations of the commission provided key support for some of the
financial system protection initiatives such as the Glass-Steagall Act and the
Securities and Exchange Act, which led to the creation of the Securities and
Exchange Commission. Pecora's aim was true; the regulatory framework set up
following his commission protected markets and investors until the mid-1990s,
right up to the time of the barking hounds of neo-liberalism flushing away the
wisdom of the 1930s to enable the miseries of today.
Many current observers have been calling for a contemporaneous Pecora-type
commission to investigate the current financial collapse, and last week, two
years after Bear Stearns' first subprime hedge funds collapsed, Washington
heard the call.
Obama signed into law legislation authorizing the creation of the Financial
Crisis Inquiry Commission. The commission, chaired by former California state
treasurer Phil Angelides, will be composed of six members appointed by
Congressional Democrats and four by Congressional Republicans; notable among
the Democratic appointees is the triumphal return of Brooksley Born, the Bill
Clinton-era chair of the US Commodity Futures Trading Commission who warned of
and tried to legislate against the danger that financial derivatives posed
before she was ground under the soles of the feet of the establishment (see
Born again - and again, Asia Times Online, April 2, 2009.)
But it is in the four Republican appointees that can apparently be seen what
the GOP's pollsters have found as a potent talking point back to power.
The Republican vice chair, former chairman of the powerful House Ways and Means
Committee, Bill Thomas, was a classic poster boy for the Republican majority
Congresses of this decade, essentially handing over the writing of important
committee legislation to corporate lobbyists to construct as they saw fit. Many
prominent Republican solons from the time were said to be figuratively sleeping
with lobbyists - in Thomas' case this was, according to a report that was never
denied from a newspaper in Thomas's district, literally true, with the married
chairman intimately knoodling over policy, or whatever they call it in
Washington, with a healthcare lobbyist.
Two of the other commission appointees, Douglas Holtz-Eakin and Keith
Hennessey, are standard-issue laissez-faire think-tank mud grunts; Eakin was a
chief economic advisor to Senator John McCain's presidential campaign. But it
is in the choice of the final commissioner, Peter J Wallison of the
conservative American Enterprise Institute, that can be seen where the right
wing in the United States thinks a rich crop can be harvested from the seeds of
the crisis.
Wallison is man with a mission. In a contention now completely discredited by
many, if not by most academic researchers of the housing market, he says that
it was the federal government's support of increased home ownership for the
disadvantaged and ethnic minorities, by first the Jimmy Carter administration
in the 1970s and then the Clinton administration in the 1990s, that essentially
put into place a sort of Manchurian Candidate "sleeper cell" that demolished
the world's capital markets starting in 2007 - the fact that this all happened
under an incompetent laissez faire Republican president and a corrupt laissez
faire Republican Congress was nothing but a remarkable coincidence.
I'm not going to further demolish the Wallison thesis here; I've done that
before, as have many others. What I do find most remarkable is the fact that
this man has been chosen by the Republicans to carry ideological water; in
effect, to rewrite the past in an effort to control the future. His message is
not that the financial markets created too much credit and should act with more
circumspection in the future. It is that the markets were fine; it's just that
too many poor, black and brown people were finding a way to get the loans the
market was making. Sure, the message to US suburbia here is, we can rev up
lending back to 2006 levels for the "new normal", just be more careful to watch
who's getting the loans.
The response to this by capital seeking to maintain its value must be similar
to something former ABC News anchor Ted Koppel once said to 1988 Democratic
Party presidential nominee governor Michael Dukakis after receiving an
insufficiently red in tooth and claw response about the death penalty.
"Governor, you just don't get it."
Does America yet "get it", the realization that, unlike what has been the norm
over the past 20 years, credit is something that must be used not with wild
abandon and dissolution but with prudence and probity? When it does is when the
economy will probably stabilize into the "new normal".
It took 62 years from the Wall Street bubble of 1929 to what some say was the
savings and loan crisis housing bubble of 1989; 11 more years to the dot-com
bubble; but only seven years to the current financial crisis. If a society was
really learning from its errors, you might expect the interval between those
errors to be lengthening, but just the reverse is happening, and lots of social
forces are doing all they can to get the next crisis blowing even earlier.
"They had learned nothing and remembered everything," was what Talleyrand
reportedly said about the Bourbon monarchy after it took power back from the
revolution and Napoleon in 1815. Will the US middle class get its most fervent
desire and be able to blow a new speculative bubble?
If so, when in a few years it collapses so hugely that no government
intervention can then save the day, Talleyrand's quote will be able to be
updated for that future circumstance, namely, that America had learned nothing,
remembered everything, and so then owned nothing and ate nothing.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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