Notes on a Meltdown, and a View of the Other Side

As the financial crisis unfolded, and after I had vented my initial righteous anger by yelling at the rogues on my TV screen to "Choke on Mortgage Backed Securities and die!" and looking up at the buildings on Wall Street screaming "Jump, you f*&!+#s...and leave those golden parachutes behind!!", I tried to sit down and make sense of what had just happened. As I looked through the alphabet soup of financial instruments and attempted to sort out labels such as Collateralized Debt Obligations, Asset Backed Commercial Papers, Credit Debt Swaps, blah-blah-blah, I started feeling like a commoner back in the day, disallowed from reading holy verses in the sacred language, while being made to feel like a sinner for questioning the high order.

The numbers were also making me numb, so I tried to figure out what a trillion was. I knew it had 12 zeros after the 1, that it was a thousand billion or a million million, but I couldn't for the life of me understand what a trillion dollars might look like. So I imagined a magic machine that spits out a $10 bill every second, all day and all night long. Nice thought. In the first minute in my fantasy world, I would have $600. In the first hour, $36,000. In the first 24-hour day, $864,000. So far, so good. But as I kept up the calculation, and as the enormity of the numbers dawned on me, I began to dismay. I realized that after one year of this enterprise, I'd have a mere $315 million or so. It would take me 3 years to get close to a billion. I'd need to collect for more than 3,170 years to walk away from my machine with a trillion dollars. If I had been a contemporary of Jesus Christ, I still wouldn't be two-thirds of the way there!

And examining the characters in the drama was rather confusing too. Turns out that Freddie and Fannie were in this dysfunctional relationship, in which Freddie was getting it on with the Lehman Brothers on the down-low, while Fannie was taking advantage of the cover provided by a Bush to make eyes at a Bear under the voyeuristic gaze of Hank, who still had the hots for his old flame Goldman, who in turn was doing this kinky stuff with Cox at the SEC, and everyone was making out without a care in the world and it was like, totally awesome. Until people started getting screwed.

But seriously. We all know by now what happened, and here's a quick version of the story. After years of a free market idolatory accompanied by policies that redistributed money from the poor to the rich, the income and wealth of Americans had become highly polarized. According to a report cited in the Wall Street Journal (so you know it must be true!), the top .01% families (14,000) in the U.S. now own 22.2% of the nation's wealth, while the bottom 90% (around 133 million!), a mere 4%. Numbers such as this haven't been seen in nearly a century. Working class families tried the stem their slide down the income ladder in a variety of ways. First, the number of women in the formal workforce started to go up. Over 60% of 16+ years old American women are now wage earners. Then, Americans started working longer by increasing the length of their work day or taking on second jobs. It is estimated that Americans now work 137 hours more each year than their Japanese counterparts, 260 hours more than the British, and nearly 500 hours more than the Germans. And when that didn't stop the bleeding, Americans turned to the option of borrowing. The financial institutions, with their pockets overflowing with cash, and an insatiable appetite for investment and profit-making opportunities were more than willing to lend. American credit card debt has now ballooned to a trillion dollars, and the carefully nurtured housing bubble—that was designed to stave off the crisis from that other bubble of the late 1990s—was used to stimulate the economy by encouraging people to buy homes or refinance them, and by pushing risky loans.

Subprime loans—those given to borrowers whose income level, ability to make a down payment, and credit history made them high-risk debtors—were turned from a tiny niche to a huge 20% slice of the market by 2006. The loans were sold with teaser rates that were designed to "balloon" after 2 or 3 years, written in ways that made them appear cheaper than they turned out to be (by hiding taxes, insurance, and delaying interest payments), and frequently targeted towards buyers in poor communities through hard-selling and false advertising. Once these loans were peddled, the industry created a bunch of abstract securities by using the mortgage as collateral, packaged them with fancy labels called MBSs-CDOs-CMOs, persuaded credit rating agencies to attach AAA labels to some of the securities, sold these to investors, exploited accounting loopholes to create shell companies called Special Purpose Vehicles (SPVs) in tax havens, and transferred the junk securities to the balance sheet of the SPVs. So by the time they were done, they had taken crappy mortgages and converted them partly into AAA securities, partly into lower rated ones, and partly into trash that was no longer on their own books. And then they did it again and again. They also gave themselves fat salaries and huge bonuses (try the $490 million Dick Fuld made during his tenure as the CEO of Lehman), and engineered their own payoff in a way that allowed them to have it taxed at the 15% capital gains rate as opposed to the 35% federal income tax rate.

One should also note that 54.7% of high-cost loans were given to blacks and 17.2% to whites. These numbers partly reflect the fact that black communities tend to be poorer than white ones. But there is also plenty of evidence to show that black families that could have qualified for a prime loan were steered towards and bamboozled into taking loans at subprime rates. The "State of the Dream" report released by United for a Fair Economy calls the fallout from the crisis the greatest loss of wealth for people of color in modern history.

And now what? The government has stepped in with more than a trillion dollars of taxpayer money—money that will not go towards rebuilding New Orleans, shoring up the crumbling public infrastructure, sending millions of children to school, and providing health care to citizens—in order to bailout the institutions that created the mess. In the meantime, the blame-game has started in earnest. If you had paid attention to Limbaugh, Hannity, and friends over the last few weeks, you'd have thought that this crisis was part of a vast conspiracy hatched by an alliance of Islamo-commie terror cells colluding with elderly blacks and Latinos in order to steal money from hardworking people like Joe the Plumber, Bob the Banker, and Mike the Mutual-Fund Manager, while the secret ACORN army was being deployed to install the madrassa-educated sleeper agent Barack Hussein Obama in the White House so that he could turn America into a socialist haven for community organizers and jihadi Islamists.

By the way, I don't subscribe—as some do—to the idea that the government should do nothing and let the banks crash and burn. Such an unleashing of "market discipline" would exact too high a price from too many. But even though there is a desperate need for the government to intervene in order to unfreeze the credit market and jump-start the stalled economy, it is difficult to trust that they will do the right thing, or that they even know what the right thing is. The more carefully one examines the landscape, the scarier it appears—in large part due to the fact that no one knows the extent of the rot. All we can really be sure about is that the dominoes are going to continue to tumble. Observers are referring to the scenario as "Whac-A-Mole"—the 1971 arcade game invention in which plastic moles keep emerging from different holes as you try to hit them with a mallet and keep them down. The disastrous initial plan of using the bailout money to buy up "toxic assets" from financial institutions—the "cash-for-trash" policy—will hopefully, and mercifully, be buried once and for all. But the idea of giving money to the banks in return for equity is running into trouble too, with banks planning to use that money not to lend, but to buy other banks, give dividends to common-stock holders, and pay bonuses to executives. And the ugly conflict-of-interest issue has raised its head again. The Bank of New York Mellon Corporation, which has been hired by the Treasury to act as a custodian of this process is apparently also a beneficiary of the handout to the tune of $3 billion.

The crisis is real. We can already see its impact on the lives of poor people all across the country. The 27 million Americans surviving on poverty wages are having to make a choice between food and medicine. And the other shoe is yet to drop. Unemployment, already very high, is on the rise and will likely reach unseen levels soon. For every available job, there are three people seeking it. Nearly 11% of American workers are unemployed or underemployed right now. As the situation worsens—and it will—we will witness a further drop in consumer spending, rise in crime, and a hollowing out of neighborhoods. Those who track such things are already seeing an increase in rates of suicide and homicide in poor and foreclosed communities.

But despite the bleakness of the times, we are possibly at the crossroads of an opportunity. I was astounded at the extraordinary sight of High Priest Alan Greenspan, testifying before the House Committee of Government Oversight and Reform on October 23rd, and admitting on camera that the Ideology of Free Markets and Unfettered Capitalism was perhaps responsible for the crisis we find ourselves in. The only other thing that could have stunned me more would have been the news that an African American with the middle name Hussein had been elected the President of the United States of America!

Not only has that event now come to pass, the shine is already off the penny. But I think it is important to jealously guard the feeling many of us experienced when the electoral college vote tally for Obama crossed the magic number of 270. To treasure the memory of the exhilaration of the moment, the sound of the collective exhaling of breath held too long, the unexpected wetness of our cheeks, the screams that allowed a pent-up emotion to find release, and the pleasure of anticipation at soon being able to say: my-oh-my, there's a black man in the White House. But it is also important to remember that it was never merely about Obama, but about standing shoulder to shoulder with tens of millions of people across the country and affirming our desire for a better world.

But that's not going to happen on its own. The recovery after the Great Depression wasn't just the result of a compassionate or competent White House. It was driven by a committed and powerful working-class movement. While unions today have been decimated over the years—union density in the private workforce is around 8%—and the immigrant rights movement is still to find its collective voice, the last 8 years of horror appear to have generated the conditions in which a new movement for social justice just might take hold. It's time to get back to work; Act 2 starts now.

Comments

"Excellent piece, Ali. Thank you. Uncertainty seems to be the only thing we can be certain of these days (and for a long time coming). World-wide jubilation that a black man has made it to the white house was fun for a minute - really really really fun - but its time to roll up our sleeves (I don't want to work as a senior greeter at Wal Mart when I'm 65 to make ends meet). We have a space in front of us where where words like ""free market"" and ""trickle down economics"" and ""investment banker"" are being scrutinized in the general public (finally!!!!) and words like ""community organizing"" ""change"" and ""grassroots"" are being understood more clearly and positively. There is, no doubt, good and bad, a change upon us."

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