Federal authorities in Detroit charged a Michigan couple Thursday with stealing information about hybrid vehicle technology from General Motors and attempting to put it to use for a Chinese car company.
The financial reform act that was signed into law this week — while imperfect — represents an important first step in attempting to preclude or mitigate future financial collapses. But increased regulation and oversight alone will be insufficient to prevent a recurrence of the recent financial crisis.
The causes of the collapse are no secret. While it is often claimed that “victory has a thousand fathers, but defeat is an orphan,” the defeat suffered by investors in our devastating financial crisis seems to have, figuratively speaking, a thousand fathers. The Federal Reserve kept interest rates too low for too long after the 2000-2002 stock market crash, and failed to impose discipline on mortgage bankers. Not only did our commercial and investment banks design and sell trillions of dollars worth of incredibly complex and risky mortgage-backed bonds and tens of trillions of dollars worth of derivatives (largely credit default swamps) based upon those bonds, they were also left holding the bag, with many of these toxic derivatives held on balance sheets that were highly leveraged — sometimes by as much as 33 to one or more. Just do the math; a mere three percent decline in asset value wipes out 100 percent of shareholder equity.
These institutions also brought us “securitization,” selling off loans as the backing for untested financial instruments, and severing the traditional link between borrower and lender. With that change, the incentive to demand credit-worthiness on the part of those who borrow almost vanished as banks lent the money, only to sell the loans to the creators of these new financial instruments. In banking, we’ve come a long, long way from community lending built on the financial probity and the character of the borrower, the kind of thing that we saw in It’s a Wonderful Life.
Our market regulators, too, have a lot to answer for: The Securities & Exchange Commission was almost apathetic in its failure to recognize what was happening in the capital markets. The Commodity Futures Trading Commission (CFTC) allowed the trading and valuation of derivatives to proceed opaquely, without demanding the sunlight of full disclosure, and without concern for the ability of the counterparties to meet their financial obligations if their bets went sour.
And let’s not forget Congress, which passed responsibility for regulation of the derivatives market to the CFTC almost as an afterthought. Congress also allowed — indeed encouraged — risk-taking by our government-sponsored (now essentially government-owned) enterprises — Fannie Mae and Freddie Mac — enabling them to expand far beyond the capacity of their capital, and pushing them to lower their lending standards. Congress also gutted the Glass-Steagall Act of 1933, which had separated traditional deposit banking from the riskier business of investment banking, a separation that for more than 60 years well-served our national interest.
Our professional security analysts also have much to answer for, especially in their almost universal failure to recognize the huge credit risks assumed by a new breed of bankers, who were far more interested in earnings growth for their institutions than in the sanctity of their balance sheets. So do our credit rating agencies, for bestowing AAA ratings on securitized loans in return for enormous fees–handsomely paid in return by the very issuers who demanded those ratings, allowing what proved to be largely junk bonds to be marketed as high-quality securities. (Yes, it’s called conflict of interest.)
An Ethical Crisis
But there is yet another factor underlying this crisis that is the broadest of all, pervasive throughout our society today. It was well expressed in a letter I received from a Vanguard shareholder who described the global financial crisis as “a crisis of ethic proportions.” Substituting “ethic” for “epic” is a fine turn of phrase, and it accurately places a heavy responsibility for the meltdown on a broad deterioration in our society’s traditional ethical standards.
Commerce, business, and finance have hardly been exempt from this trend. Relying on Adam Smith’s “invisible hand,” we have depended on the marketplace and competition to create prosperity and well-being. But self-interest got out of hand. It created a “bottom-line” society in which success is measured in monetary terms. Dollars became the coin of the new realm. Unchecked market forces overwhelmed traditional standards of professional conduct, developed over centuries.
The result has been a shift from moral absolutism to moral relativism. We’ve moved from a society in which “there are some things that one simply does not do” to one in which “if everyone else is doing it, I can too.” Business ethics and professional standards have been lost in the shuffle. The driving force of any profession includes not only the special knowledge, skills and standards that it demands, but the duty to serve responsibly, selflessly and wisely, and to establish an inherently ethical relationship between professionals and society. The old notion of trusting and being trusted — which once was not only the accepted standard of business conduct, but the key to success — came to be seen as a quaint relic of an era long gone. Somehow, our society must be spurred into action to return to that standard.
Until it is, I fear that a repeat of our recent meltdown is not just possible, but probable, for there’s no end to the ways that motivated individuals can get around even the most stringent regulations. True reform of our financial markets will not be found until our nation’s financial professionals turn their focus away from the salesmanship that produced so much of the excess of the recent era, and embrace the stewardship that their profession demands. Such a change cannot happen soon enough.
This essay has been adapted from the Author’s Note of Enough: True Measures of Money, Business, and Life.
“A couple of weeks ago I got discouraged,” said Special Terry, a nine-year veteran of the New York City Department of Health and Mental Hygiene. “My daughter said ‘I hope what happened to you doesn’t make you forget about your dreams and aspirations.'”
What happened to Terry was a worst case scenario. She knew that the Department had to lay some people off due to budget cuts, but she hoped she wasn’t one of them.
After all, Terry was one of the most experienced social workers in her office. She had been working for the Department for years as a public health educator and correctional counselor, transitioning people from jail back into their communities. She had skills. She was about to get a Master’s in Education from Long Island University.
In early May, however, together with three other colleagues, she received a letter. Her last day of work for the City was May 14. On that day she lost her health insurance as well.
Until that point, Terry, a 45-year-old single parent of two daughters, had done well for herself and her family. She was earning $1,352 every two weeks, enough to pay the $679 rent for low-income housing in the North Bronx and support her daughters. Her older daughter, Chrisshawmba, 22, graduated from college last year with a degree in Criminal Justice. Her younger one, Erica, 13, is in middle school.
But suddenly the only money she gets is $380 weekly from unemployment. Like many other New Yorkers battling the economic downturn, she entered a different, uncertain world. It’s a world where if your daughter gets sick, you don’t know how to pay for the hospital. It’s a world where you scramble to cover rent while desperately looking for jobs. And you have to do everything at the same time, quickly.
Terry has always made a point of was having good medical care for her children, but now, with health insurance gone, she just prays that her kids don’t get ill. In early July, however, an insect bit her daughter, sending her to the emergency room. When Terry told the doctors she had no insurance, they panicked, she said, and told her to apply for Medicaid. But because she collects unemployment she is ineligible for Medicaid. Her daughter feels better, but Terry is worried about the medical bill waiting around the corner.
Terry is also concerned about her younger brother’s son, Dejon, the sick, two-year-old boy she is raising. Dejon’s mother passed away last August, and nobody else can care for him. Born prematurely, Dejon’s lungs never developed completely. In the last 11 months he has had three hospitalizations for pneumonia.
For Terry, who had never experienced unemployment before, the most humiliating aspect of her new life was applying for food stamps. She felt other people would see her as someone who exploits the system, rather than as someone who needs a little help to get back on her feet.
“When people lose their jobs and go to agencies where people receive on-going assistance, they kind of view you like you are a loser,” said Terry, who feels she is not begging, only getting her due. She eventually successfully applied online for food stamps through LIFT, a non-profit organization whose stated mission is to combat poverty and expand opportunity.
In between tending to the baby, counting her pennies at the grocery store, and showing up in court to get her rent adjusted to match her new, lowered income, Terry frantically scours the internet for jobs.
In two months she has scored three interviews, including one with Odyssey House, a drug treatment center based in New York City. But she has still received no callbacks. The memory of the lost job she loved motivates Terry to keep looking for positions and keeps depression at bay.
Terry will get her Master’s in Education in September. She is confident she will land some job by the end of August. She also still hasn’t given up on her dream, founding an organization to help integrate formerly incarcerated people back into her neighborhood, the Edenwald Projects in the North Bronx.
That brings her back to her daughter’s words about her aspirations, which make her feel better.
“I’m gonna get back out there again,” she said. “It’s just a matter of time.”
The world economy is entering a new phase after the failure of fiscal stimulus to create a sustained recovery in either the US or Europe. In the US, consumers have retrenched, housing starts have crashed and a double-dip recession is possible. In Europe, fiscal retrenchment is under way after intense market pressures. A new approach to recovery is needed.
The striking feature in the current debate about austerity and stimulus has been the lack of attention to investment. Consumers will not provide the engine of recovery, nor should they after overspending for a decade. Instead, the US and Europe should be using the recent corrective boost in saving rates to promote long-term investments in physical and human capital as the proper way back to sustained growth.
Despite the evident need for a rise in national saving after 2008, President Barack Obama tried to prolong the consumption binge by aggressively promoting home and car sales to already exhausted consumers, and by cutting taxes despite an unsustainable budget deficit. The approach has been hyper short term, driven by America’s two-year election cycle. It has stalled because US consumers are taking a longer-term view than the politicians.
By contrast, the administration’s interest in boosting investment has been haphazard. Mr Obama has shown a strange inability to articulate an operational and forward-looking policy framework in signature areas such as healthcare, energy, climate change, and long-term fiscal policy. At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more.
It is wrong in this context to believe that the only choice is further fiscal stimulus versus a repeat of the Great Depression. Further short-term tax cuts or transfers on top of America’s $1,500bn budget deficit are unlikely to do much to boost demand, while they would greatly increase anxieties over future fiscal retrenchment. Households are hunkering down, and many will regard an added transfer payment as a temporary windfall that is best used to pay down debt, not boost spending.
Businesses, for their part, are distressed by the lack of direction. The US Chamber of Commerce was not simply lobbying when its director of government affairs recently declared to the Financial Times that: “When businesses try to plan out what their tax liabilities will be next year, or game out credit availability or the investment climate, they just don’t know what it will look like. Uncertainty is a real killer.”
A proper US investment recovery plan has five parts. The first is a significant boost in investments in clean energy and an upgraded national power grid. These should be promoted through guaranteed price subsidies to clean energy to be financed by gradually rising carbon taxes, as the clean energy capacity comes on line during the coming decade. The alternative cap and trade system is cumbersome, unnecessary and politically dead.
The second is a decade-long program of infrastructure renovation, with projects such as high-speed inter-city rail, water and waste treatment facilities and highway upgrading, co-financed by the federal government, local governments and private capital. Such projects are complex, requiring government leadership in land management, project design, public-private co-operation and partial subsidy or credit guarantees. New tools can help, such as a national infrastructure bank – championed last year before plans were strangely downplayed.
The third component is more education spending at secondary, vocation and bachelor-degree levels, to recognize the reality that tens of millions of American workers lack the advanced skills needed to achieve full employment at the salaries that the workers expect. The unemployment crisis is largely a structural crisis of job skills. It is hitting young workers – many of whom should still be learning – and older workers who lack a degree.
The penultimate part of the plan is boosting infrastructure exports to Africa and other low-income countries. China is running circles around the US and Europe in promoting such exports of infrastructure. The costs are modest – essentially just credit guarantees – but the benefits are huge, in increased exports, support for African development and a boost in geopolitical goodwill and stability.
The fifth and final element should be a medium-term fiscal framework that will credibly reduce the federal budget deficit to sustainable levels within five years. This can be achieved partly by cutting defense spending by two percentage points of gross domestic product, meaning ending the Iraq and Afghanistan occupations and cutting wasteful weapons systems. Other measures should include gradually phasing out the tax subsidy on high-end health insurance, taxing Wall Street bank profits and bonuses, raising high-end marginal tax rates and, if necessary, introducing a small value added tax. Public investment costs could be financed mainly by public tolls, gradually rising carbon taxes and by repayments of international loans to finance the export of infrastructure.
The Obama administration and Republican opposition are both guilty of irresponsible short-termism and lack of forward-thinking. Both would dangerously prolong the budget deficit, the first through a combination of increased fiscal transfers and tax cuts, and the latter through even larger and more unsustainable tax cuts. Neither would do what America needs and China is doing better: investing for the future through serious attention to sustainable energy, cutting-edge infrastructure, enhanced labor-force skills and the promotion of international development through the export of infrastructure.
The author is director of The Earth Institute at Columbia University.
This article originally appeared in The Financial Times.
Times are tough. Unemployment numbers are dismal, people’s homes are still going back to the banks, and gas prices are on the rise. But you know what? Maybe the universe is sending a message loud and clear: money isn’t everything. There’s a different way to prosper.
I saw an interview with Kurt Cobain about his transition from musician to icon. He told the interviewer that he missed the special times when he could find the perfect item at a thrift store. Eventually he could afford to buy whatever he wanted, but he said it didn’t have the same magic.
I know people who are finding magic in their lives right now. It’s coming in forms of help from neighbors, friends, family, and churches. The abundance is also coming from perfect timing, coincidences, and unexpected small windfalls.
Maybe our country is learning about a new form of currency. Big business doesn’t control it, and your job doesn’t dictate it; it’s an energy force all its own.
In my intuitive practice, I create exercises to help people let go of their anxieties and bring in their abundance, and it works. Here’s a quick exercise. Take a permanent marker, an old plate, and a hammer. Write down everything that’s bugging you on the plate. Then smash it to bits with the hammer. The idea is that you’ve taken all the troubles out of your head, broken them up, and handed them off to where they should go: to the universe.
The next exercise is about creating what you want. Take another plate, write down pictures of what you want, place tea candles on the plate, and then call in God’s abundance.
Here’s a video how-to from yours truly:
In this video I use a Wiccan symbol, but you can also use any religious or spiritual icon that you like. These exercises work. The latest video was made a week ago, and I’ve had dozens of people tell me that they did it and they manifested.
The point is this: we have it in our power to manifest, no matter what the economic circumstances are around us. Sometimes we have to take our desires into the physical realm to make them real. I share this for those of us who sometimes feel powerless amidst our circumstances. Perhaps this money debacle is a chance for us to reclaim our real power.