Burned By The Fire
by Bruce Fisher
How McCain's economic advisor, and Bill Clinton's, screwed the American economy
This week’s Wall Street problems look far away. They are not. Around 20 percent of all the tax revenue in New York State is derived from taxes on the salaries and transactions that occur on Wall Street. New Yorkers should brace themselves for a significant change in the way that Governor David Paterson’s staff will prepare the 2008-2009 budget.
Expect more of what county executives and city mayors and town supervisors call “downloading,” which is another way of saying that the State of New York will tell all the 4,500-odd little governments outside New York City that they can continue to exist, but that they’re going to do so without as much Albany money as they’re used to getting.
County governments in particular will face a crunch, as county governments function as branch offices of state government. “Downloading” in counties will mean that Albany will mandate that counties still provide services, but will tell counties to get more local money in order to fund those services.
Expect squealing and drama, but please note that Upstate New York has been on Wall Street’s dole for decades. As New York Mayor Michael Bloomberg’s budget office showed in a 2004 report, Upstate gets $11 billion more of Albany’s money than Upstate pays in. The “oppression” of Albany is actually an amazingly lucrative transfer of value from Downstate to Upstate—as richer and more populous Downstate foots our bills.
The trouble now is that Wall Street has been the largest single source of those funds.
This week’s Wall Street troubles will hit home. But because of some changes Washington made during the height of the Monica Lewinski distraction in 1998 and 1999, what we’re experiencing is not just one of those occasional stock market swoons or interest-rate tangos.
What’s going on now is a calamity of the sort not seen since—dare we say it?—the dark days of 1929.
The FIRE bubble is bursting.
Finance, insurance, real estate
There’s this scary economist named Eric Janszen whose Web site is http://www.itulip.com/. He doesn’t care if you think he’s nuts, because he’s been correct about every economic up and down for the past decade, including the tech-stock crash of 2000. Smart rich people I know swear by him. Other economists respect him.
Janszen says that we’ve been in a “bubble” economy fueled by insane, irrational, irresponsible speculation on real estate. He predicts housing values to drop by almost 40 percent. That may not sound like much of a problem up here in the North, where housing prices never went nutso as they have in the large metro areas of the East and West Coasts and in the Sun Belt.
But therein lays the problem. There has been so much of what Janszen calls “fictitious value” created by the real-estate boom—and then so much speculation by big hedge funds and other financial institutions based on that fictitious value—that the fantasy of real-estate riches came to dominate our economy.
His Web site can be a tough read. But in the February 2008 issue of Harpers magazine, he wrote a long article in fairly plain English about how the housing bubble came about and why, in the era of Republican-led deregulation and federal budget deficits, it’s a huge problem.
“The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless,” Janszen wrote earlier this year.
In other words, the Clinton years of surpluses, and Clinton’s 1993 tax increases on upper-income earners, plus the technology-driven economic expansion, made recovering from the dot-com collapse of March 2000 a relatively easy adjustment.
But then came the Republican-dominated Congress with a Republican president, which meant further deregulation, tax cuts for high-income and wealthy folks, and budget and trade deficits.
“Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect,” Janszen wrote. “The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.”
In other words, nothing is easy now.
Janszen says that the only way out of this mess is to await a new bubble—a new technology bubble like the dot-com bubble that burst in 2000, or a Web 2.0 bubble, or an alternative energy bubble. Janszen thinks that only a massive rush of capital into alternative energy has a chance of lifting the American economy…but it’s not an instantaneous thing, and not everybody agrees with him. Kevin Phillips, author of Bad Money, is skeptical that wind, solar, or even nuclear will come on-line in time to meaningfully supplant foreign-produced petroleum.
But Janszen, Phillips, and others agree that the FIRE economy is burning us. By letting the speculators gamble everybody’s money on made-up, invented, totally bogus investments, our elected representatives in Washington—who were supposed to be regulating Wall Street—put our country at risk of a sudden, sharp economic collapse.
Which is what we’re facing now.
After the Wall Street crash of 1929, President Franklin Delano Roosevelt and the Democratic majority in Congress reined in the speculators who had put bank depositors, home-owners, and other small-time savers’ money into the Wall Street casino. They enacted a very stodgy piece of legislation called the Glass-Steagall Act.
That legislation put a wall up between commercial banks and investment banks. For 60 years, until 1998, your savings account did not fund speculation on Wall Street. Your world of risk, as a depositor in a commercial bank, was small.
But then, at the height of the Monica Lewinsky distraction, Republicans in Congress, and Bill Clinton’s Treasury Secretary Robert Rubin, collaborated in taking away the rules that protected this country from facing another 1929.
Democratic President Bill Clinton signed the Financial Services Modernization Act of 1999, known as the Gramm-Leach-Bliley Act. This law effectively deleted the prohibition on commercial banks owning investment banks and vice versa.
Remember these names:
Former Senator Phil Gramm, who now advises Senator John McCain and is the person who says that folks who fret about current economic conditions are “whiners”; Clinton Treasury Secretary Robert Rubin, one of whose protégés advises Senator Barack Obama; and Alan Greenspan, former chief of the Federal Reserve.
Gramm, Rubin, and Greenspan made this debacle possible.
“Our economy is in serious trouble,” writes Janszen on iTulip.com. “Both the production-consumption sector and the FIRE sector know that a debt-deflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression.”
The politics of this is going to be ugly.
Local and state politics in New York will get a whole lot uglier in the next little while, because Albany—certainly a victim of Washington’s 1999 policy shift—is stuck paying for federal social programs and for suburban school districts even as unemployment grows, petroleum prices spike, and employee pension costs swell.
Meanwhile, the national anti-government rhetoric will start escalating again—even though there is a broad consensus even among investors, speculators, Wall Street professionals, and economists that the problem of the FIRE economy bubble came about not because of too much government, but rather because of not enough.
And expect to hear the “d” word, too. Depression. And not just because the autumnal equinox marks the end of summer next week.
Bruce Fisher is Buffalo State College visiting professor of Economics and Finance, where he directs the Center for Economic and Policy Studies.