We live in troubled and ironic times. The times are certainly troubled. The IMF’s Managing Director has recently spoken with some justification of a looming “lost decade” for the global economy – warning of “dark clouds” blocking the capacity of the world’s leading economies to deliver a renewed bout of economic growth and generalized prosperity.[1] The times are also deeply ironic: since the governing solution to those dark clouds – in countries as substantial as Italy and Greece, and in institutions as powerful as the IMF – would currently appear to be the replacement of elected leaders by appointed technocrats. The solution favored by the powerful is the transfer of state authority from democratically chosen leaders to governors drawn predominantly from the ranks of the very bankers whose inadequate supervision of their own industry darkened the skies in the first place. In this manner, a global financial crisis that initially discredited bankers has incrementally morphed into one to be settled on terms directly specified by bankers themselves.[2] A crisis of economics has been turned into a crisis of democracy. It is an outrage.

The only thing challenging that morphing is the explosion of popular protest which has accompanied it. In key cities in Europe now, the battle lines are being drawn between the technocrats in the ministries and the protesters on the streets. In key cities in the United States, similar lines exist between those who control Wall Street and those who occupy it. If the next decade is not to be lost, it is absolutely vital that, in the clash between money and the people, the people win.

But will they? Only if, inspired by the occupation of Wall Street, a wider political constituency in the United States comes to recognize the force of four truths that the conservative media work endlessly to deny.

1.      It was behavior by key privately-owned financial institutions, and not action by federal agencies, that caused the economic crisis of 2007-8, even though leading figures within those financial institutions have yet to be held accountable for that behavior. Wall Street, not Pennsylvania Avenue, made this mess.

·         A lot of ink is spilt these days blaming our existing economic problems on excessive government spending and the over-regulation of private industry, particularly private banking. Nothing could be further from the truth. It was a deregulated set of major privately-owned financial institutions, each seeking profit growth by speculating with other people’s money, that triggered the credit bubble of the Bush years and which brought the global banking system to temporary gridlock in September 2008.[3] In the first years of the new millennium, “Goldman envy,” as it was reportedly termed, drove investment banking into a frenzy of risk taking for which later even Goldman Sach’s Lloyd Blankfein publicly apologized.[4] People complain now about anarchist elements in the OWS movement damaging property. They are right to be critical; but if they are to be consistent, they must also recognize the vastly greater scale of damage to property (and to human happiness) inflicted by Wall Street excess prior to 2008. According to later IMF calculations, the toxic assets released into the global banking system by Wall Street institutions cost that system at least $4.1 trillion; and it cost the rest of us maybe 50 million jobs world-wide.[5] Anarchist-inflicted damage on shop windows and parked cars is as nothing compared to the scale of factory closures and community destruction inflicted by a deregulated banking sector.

·         Far from being punished for their anarchy, those financial institutions then received huge quantities of public assistance. For all the claims now that government profligacy is our problem, without major injections of public money into the U.S. and European banking systems in 2008-9, the recession would have been deeper and many of those privately-owned financial institutions would have collapsed. Until recently, “the scope of the Fed’s private lending had…only been guessed at, but figures obtained under the Freedom of Information Act….show the nation’s central banker issued loans to more than 30 institutions between August 2007 and April 2010, including over 100 loans of $1 billion or more.”[6] At the peak of the crisis, in December 2008, the Fed had $1.2 trillion of loans outstanding to major U.S. and European financial institutions, and that was just part of “$9 trillion in low-interest overnight loans to banks and other Wall Street companies [made by the Fed] during the crisis.”[7] “The data reveal banks turning to the Fed for help almost daily in the fall of 2008 as the central bank lowered lending standards and extended relief to all kinds of institutions,” with the biggest users of the Fed lending programs being “some of the world’s largest banks, including Citigroup, Bank of America, Swiss-based UBS and Britain’s Barclays.”[8] Action by public authorities saved Wall Street in 2008-9. Bankers were not so quick to label such spending as profligate when they themselves were the recipients of the public money being spent.

·         Moreover, major financial institutions have regularly of late made modest settlements with regulatory agencies: trading a degree of repayment of profits acquired by dubious means for freedom from further federally-initiated legal action.[9] “Deferred prosecution” is the euphemism used, as companies make very small financial settlements and very big promises of reformed behavior.  So JPMorgan Chase settled with the SEC for $228 million in July, the same month the Federal Reserve fined Wells Fargo a mere $85 million. (Wells Fargo’s revenues in the last quarter before the fine exceeded $20 billion![10]) Thus far no major financier has been jailed for any wrong-doing during the run-up to the worst financial meltdown the global economy has experienced since 1932, and the Obama administration has not yet sought damages in any way commensurate with the scale of the damage inflicted. Other agencies and individuals are still seeking recompense through litigation, including the Federal Housing Finance Agency and the Attorney Generals of both California and New York – so bigger settlements may yet be made: but even someone as centrally involved in subprime lending as Angelo R. Mozilo of Countrywide Financial currently remains at liberty, the bulk of his personal wealth intact.  So too does Joseph J. Cassano, head of Financial Products at A.I.G.[11]

2.      The resulting recession continues to cause widespread economic misery, but it has not prevented key financial institutions from renewed profit-taking and sustained resistance to their tighter regulation. Wall Street has gone on its merry way, declining to help clean up any part of the mess that its excess made.

·         Main Street continues to struggle. What economic recovery has occurred remains largely jobless in nature, with companies reluctant to hire and banks reluctant to lend. The money that reconstituted them has yet to be passed on in equal measure to the small and medium size enterprises that are so heavily dependent, for their capacity to function at all, on a regular flow of easily-available bank credit. Currently the top 20 banks in the United States, the very banks bailed out in 2008-9 by taxpayer largesse, “devote only 18 percent of their commercial loan portfolio to small business.”[12] Profit levels and employment levels in the rest of the U.S. economy remain low. Poverty levels remain high, and the distribution of income and wealth remains unusually unequal.[13] All this at the very time when American banks are quietly raising the fees they charge,[14] and when both in the U.S. and in Europe the biggest companies are now excessively cash-rich, poised to engage in a frenzy of mergers and acquisitions that will create ever larger companies without any commensurate increase in employment.[15] Indeed the banking sector has lately made its own contribution to America’s high level of long-term unemployment. It is worth noting that Bank of America’s decision to lay off 30,000 of its employees was the largest single culling of staff by any single private company in the United States in the whole of 2011, and Bank of America is not the only major financial institution currently culling the lower ranks of its staff.[16]

·         Senior figures in leading Wall Street institutions, by contrast, have rapidly returned to their old and personally profitable ways.[17] As John Cassidy put it, “on Wall Street, the Great Depression didn’t last very long.”[18] The bonuses of senior figures, curtailed in 2008 and 2009 under a gale of public criticism, quickly returned to pre-recession levels as public attention shifted elsewhere. “In New York City, the average Wall Street salary last year grew 16.1 percent, to $361,330, which [was] more than five times the average salary of a private-sector worker in the city.”[19]  Profit margins in the financial sector have similarly bounced back, as have practices roundly condemned in the immediate wake of the 2008 meltdown as financially destabilizing.[20] The largest financial institutions in particular have flourished well in the wake of the recession that their misjudgments generated: “Since December 31, 2008, the largest banks – those with more than $100 billion in assets – have increased their total combined assets by about 10 percent.”[21] The top four U.S. banks held 32 percent of total bank deposits before the recession. They now hold 40 percent.  Not that most of what large Wall Street institutions do is in any way useful. “Socially useless activity” is how the chairman of the UK’s financial watchdog, the FSA, famously characterized it.[22] But the lesson is clear: being useful is not the way to grow rapidly rich in our crazy casino economy.

·         Resistance by financial institutions to tighter regulation under Dodd-Frank and through Basle III has now intensified.[23] Working closely with Republicans in Congress, the banking lobby effectively blocked the appointment of Elizabeth Warren as head of the Consumer Financial Protection Agency created by the new legislation. Together they slowed down the development and introduction of the regulations required by Dodd-Franks: by June 2011, just 24 rules had been completed, out of 385 required.[24]  In spite of the Obama administration’s persistent willingness to moderate the new regulations, Wall Street firms spent $52 million on lobbying in the first quarter of 2011 alone: more than they spent on lobbying when the new financial legislation was being debated and passed in 2010.[25] In September, Jamie Dimon (the chief executive of JPMorgan Chase) even went so far as to condemn the modest new requirements of Basle III for higher capital ratios as “anti-American,”[26] earlier saying that attempts at tighter regulation were the cause of the prolonged recession: that financial reform legislation was, as he put it, “holding us back at this point.”[27]  As Sony Kapoor, managing director of Re-Define, a financial think tank, told the Financial Times in October: “big banks are seeking to moderate progress that has been made, using as an excuse the very crisis they helped trigger.”[28] It is not just Wall Street profits that have rebounded. So too has Wall Street arrogance and self-confidence.

3.      The sovereign debt crisis now bedeviling the Eurozone economies is a direct consequence of similar errors of judgment by European financial institutions. It is one compounded by public spending decisions made to counter the effects of a 2008 financial meltdown imported into Europe through trans-Atlantic banking networks. Wall Street institutions helped spread the mess from here to there.

·         Arrogance and self-confidence has been evident too in the lending practices of leading European banks. With the establishment of the Eurozone in 1999, money flowed from northern European banks into Mediterranean economies which were then thought to be fully protected by their Eurozone membership. The U.S. investment bank Goldman Sachs proved to be a key player here, helping the Greek government maintain this damaging illusion by obscuring its scale of indebtedness. As The Financial Times reported as early as February 2010, “outright anger” was growing in Europe long before the current crisis: anger “about the role played by western investment banks and hedge funds,” anger about “the role that Wall Street titans such as Goldman Sachs have played in helping Greece and other Eurozone countries to massage their debt data over the past decade to meet European limits, and thus to mask some of the fiscal woes that have now come back to haunt international markets.”[29]

·         Government debt may now be the issue in parts of the Eurozone, but even in those troubled economies public debt was not the prime driver of economic growth after 1999. That role was played by private debt – flows of money from northern banks financing private consumption along the Mediterranean coast, particularly the consumption of housing. In 2010, “the ratio of private to public debt in Spain, Portugal and Greece [was] respectively 87:13, 85:15 and 58:42. The bulk of fresh debt created in the course of EMU [was] private, while public debt [fell] proportionately.” It was the recession of 2008-9 which then “boosted public debt, turning it into the pivot of the Eurozone crisis.”[30]  Government debt in the Eurozone as a percentage of GNP declined from 72 percent in 1999 to 67 percent in 2007.[31]  Spain, for example, cut its government debt from 60 to 40 percent in the decade before 2008, and its public finances were in surplus immediately before the 2008 Wall Street implosion.  Pre-2008, Irish public finances were also in solid order – Ireland had a balanced budget – balanced, that is, until the private banking system in Ireland collapsed and the Irish government moved in to bail it out. The Portuguese story is not qualitatively different.[32] Greece alone was the outlier – with a debt ratio of 100 percent of GDP when it joined the euro in 2001 – its sins obscured for a decade with help from Goldman Sachs.[33] So let no one claim that it is the big welfare states of Europe and the big public spenders who are now most in trouble.  They are not. The big welfare spenders are the Scandinavian economies, not the Mediterranean ones: and yet it is with the viability of Greece, Italy, Portugal and Spain that foreign investors are now the most concerned.

·         The problem of sovereign debt is currently being compounded by the terms which financial institutions inside and outside the Eurozone are now demanding as proof of the ultimate reliability of the loans they have made/are making. The terms are austerity terms – demands for huge and immediate cuts in public spending of the sort normally only inflicted on third world economies in receipt of an IMF bailout. The casualties of those requirements are not bankers. They are European workers and the European poor. By hitting both, so lowering consumer demand, the terms set as new loan guarantees will inevitably push economy after economy into stagnation/recession, lowering the level of GDP and perversely increasing the debt burden.[34] As Martin Wolf put it, “the Eurozone has decided that the losses of private sector creditors should be socialized and the ultimate burden fall on the taxpayers of deficit countries. The latter will then suffer first a slump and then years of fiscal austerity.”[35] How then can we be surprised that Eurozone unemployment is now at record heights – some 15.7 million people were out of work across the zone as a whole in September – and that sane voices, in the European labor movement and beyond, are now arguing strongly for a jobs and growth strategy rather than an austerity one,[36] begging European leaders not to compound a banking crisis with a self-inflicted recession. It is a call that major European political leaders – particularly those in Berlin and Frankfurt – are not yet heeding, to their immediate discredit and to our future discomfort.[37]

4.      Financial institutions were the conduit through which the original U.S. crisis crossed into Europe; and they may yet be the conduit by which the resulting Eurozone crisis flows back into the U.S. We are still living with the consequences of one banking crisis and may yet have to endure the consequences of another. This banking crisis might yet return to bite us a second time.

·         It is a mistake to think that the adverse consequences of the 2008 meltdown have now been entirely washed out of the global financial system. They have not. Major European banks remain dangerously exposed to the long-term consequences of the U.S. housing crisis, many of them still sitting on large quantities of “credit-market assets dating back to the first round of the financial crisis in addition to sovereign debt from struggling Eurozone countries.”[38] The Wall Street Journal reported the Royal Bank of Scotland with €79.6 billion of credit-market assets currently on its books but only €10.4 billion of sovereign debt. The reported ratios were similar for HSBC: 54.3:14.6; Deutsche Bank 51.9:12.8; and ING 36.0:11.2. It is true that some European banks are ratioed the other way, heavily over-exposed to sovereign debt. The ratio of credit-based assets to sovereign debt for the Italian bank UniCredit, for example, is 7.2:51.8; and Dexia, the Franco-Belgian finance house that came close to collapse in October, reportedly had 21 billion euros of Greek, Italian, Spanish and Portuguese bonds on its books when its flow of credit dried up.[39] But whichever way the ratio goes, one thing is abundantly clear. Major European banks have toxic assets on their books that straddle the Atlantic and leave them vulnerable to meltdown in the event of a sovereign debt default by any major Eurozone economy.[40] Even the kind of settlement proposed for the Greek economy – a voluntary mark-down of 50 percent of the value of existing Greek debt – is bound to establish so powerful a precedent, and to give European banks so severe a “haircut,” as to seriously threaten their capacity ever to grow a full scalp again.[41]

·         This is not just Europe’s problem. It is also ours. U.S. banks remain similarly exposed to both the on-going U.S. housing crisis and the Eurozone debt crisis. Bank of America’s share price fell dramatically in August because of the Bank’s need to take additional write-offs on bad mortgages acquired with its 2008 purchase of Countrywide Financial;[42] and the U.S. banking system as a whole is currently holding in total “about $700 billion of government debt from the five shakiest Eurozone economies.”[43]  “Among Dexia’s biggest trading partners [were] several large United States institutions, including Morgan Stanley and Goldman Sachs;”[44] and the CBO recently estimated that U.S. bank exposures to “German and French banks are in excess of $1.2 trillion, equivalent to about 10 percent of total commercial bank assets in the United States.”[45] The Geneva-based Bank for International Settlements similarly reported that “at mid-year banks in the United States had $757 billion in derivatives contracts and $650 billion in credit commitments from European banks.”[46] In the second quarter of 2011, if the Financial Times data is correct, that included a gross[47] exposure to French banks by the big American Five of nearly $180 billion: Goldman Sachs $108.5 billion, Morgan Stanley $28.1 billion, JPMorgan Chase $22.8 billion, Citigroup $8.9billion and  Bank of America/Merrill Lynch also $8.9 billion.[48]

·         That should not surprise us because it is hard to overstate the degree of integration of the two regional economic blocs. “The European Union and United States economies are the two biggest in the world and their financial institutions are deeply intertwined. They have the single largest bilateral trade relationship in the global system, together accounting for nearly a third of global trade flows.”[49] The danger of contagion from the Eurozone crisis back into the United States is now unavoidably real. The cumulative effect is an already visible tightening of U.S. lending volumes and terms.  As Roger Altman noted: ‘for the American and western European economies to decline again, when unemployment levels are already so high, would be disastrous.”[50] And yet the danger signs are thickening daily: that the European banking crisis might creep back into the U.S. through Wall Street institutions, just as once the U.S. crisis crept out into the Eurozone through a similar set of relationships.

We are now in the fourth year of an ongoing financial crisis. It is one characterized by bank failures at the beginning (the crisis of toxic assets), bank failures in the middle (the failure to release investment funds), and now, more than likely, bank failures at the end (this time, slipped in from Europe).  If a second recession is in our future, it is important that we learn the lessons of the first. If once more these grotesquely over-large and over- arrogant financial institutions begin to fail, they should not be bailed out with endless tax dollars. They should be taken directly into public ownership, so that their investment decisions can be dictated by long-term reconstruction needs rather than short-term profit-taking, and so that their senior figures can be paid public-sector wages. And then, if these wayward financial institutions are ever returned to private ownership, they should first be broken down and sold in smaller units, with their future size capped and their functions separated by a modern version of the Glass-Steagall Act.[51]

The only force keeping this case for financial control alive and well in the United States is the Occupy Wall Street protest movement. Bernie Sanders is quite right: “the Occupy Wall Street protests are shining a national spotlight on the most powerful, dangerous and secretive economic and political force in America.”[52] In the wake of the Citizens United Supreme Court ruling, the bulk of the American political class has been bought. In the wake of the Eurozone crisis, the Greek and Italian political classes have been dismissed. On both continents the people doing the buying and the dismissing are ultimately senior bankers. “Why are so many people protesting against Wall Street?” John Wells asked. “Because it has become stronger than our democratic state and if unrestrained will take us down the dark road to political dictatorship to join the economic tyranny it currently enjoys.”[53] Republicans are quick to tell us these days that when we protest against Wall Street excess, we introduce class warfare into American politics. But if this long financial crisis tells us anything, it is that class warfare was fully embedded in the American political system long before any of us decided to protest.[54] As Dean Baker said: “When Wall Street rules, we get Wall Street rules.”[55] Politics in a class-ridden society is always ultimately a zero-sum game. It is time therefore – in contemporary America – for class warfare by the economic elite to be superseded by class warfare by the working people: and not just time, but time that is long overdue.

First posted at www.davidcoates.net