The Big Takeover: How Wall Street Insiders are Using the Bailout to Stage a Revolution

Full text of Matt Taibi’s recent Rolling Stone article on the bailout:

So that’s the first step in wall street’s power grab: making up things like credit-default swaps and collateralized-debt obligations, financial products so complex and inscrutable that ordinary American dumb people – to say nothing of federal regulators and even the CEOs of major corporations like AIG – are too intimidated to even try to understand them. That, combined with wise political investments, enabled the nation’s top bankers to effectively scrap any meaningful oversight of the financial industry. In 1997 and 1998, the years leading up to the passage of Phil Gramm’s fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone – then the chairman of the Senate Banking Committee – collected $2.6 million in only five years. The law passed 90-8 in the Senate, with the support of 38 Democrats, including some names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.

The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America – and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures. “We’re moving to an oligopolistic situation,” Kenneth Guenther, a top executive with the Independent Community Bankers of America, lamented after the Gramm measure was passed.

The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote. At the time, the European Union was threatening to more strictly regulate the foreign operations of America’s big investment banks if the U.S. didn’t strengthen its own oversight. So the top five investment banks got together on April 28th of that year and – with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson – made a pitch to George Bush’s SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision.

CommonDreams: The Big Takeover: How Wall Street Insiders are Using the Bailout to Stage a Revolution

This is the most comprehensive, clear, and funniest article I’ve read on the bailout yet.

It’s curious that Taibi doesn’t even mention Fannie and Freddie in this article, however.

Capitalists on the defensive

If you ask a staunch capitalist about the global economic meltdown and the state of the system that brought us to this point they say “that isn’t really capitalism.” This sounds a lot like the socialists they’ve always criticized who defend their ideology by saying that the Soviet Union and China aren’t REALLY communist.

In the afterword of the copy of Anthem I read years ago, Ayn Rand wrote that if collectivists were successful in the political agenda, we would end up with a world much like Rand described in Anthem and the well-meaning commies behind it all would stand up and say “But this isn’t what we MEANT.”

Today, it is the those free market ideologues who are left to say “this isn’t what we MEANT.”

The current global economic crisis should lay rest to the notion that markets or the invisible hand or whatever can produce the “least bad,” let alone “optimal,” economic results. None the less, there are still those who would try to blame government intervention, rather than market failure, for the situation. In January, Reason Magazine ran a few articles on the subject, notably:

Is deregulation to blame? by Katherine Mangu-Ward


Anatomy of a Breakdown by Michael Flynn

This is a great pair of articles – they provide a clear, easy to understand insight into what went wrong. But they fail to make the case the authors are trying to make: that not only is deregulation not to blame, but that government policy is to blame.

Weirdly, Katherine Mangu-Ward finds case by case that the arguments that deregulation are to blame are in fact correct (with the exception of blaming the Glass-Steagall Act), and then concludes the exact opposite. She admits the The Commodity Futures Modernization Act of 2000, a loosening of debt rules in 2004, and the lack of oversight of Fannie and Freddie caused the meltdown. Her essential argument, however, is that the debt rule change and the lack of oversight of Fannie and Freddie are not technically deregulation but misregulation. This semantic argument does nothing to support the idea that banks (and by extension “the market”) can self-regulate. In fact, Mangu-Ward’s examination of the facts should lead to the exact opposite conclusion: left to their own devices, banks make stupid, stupid mistakes like taking on too much debt and trading in crazy derivatives.

Michael Flynn meanwhile makes the case that the government’s home ownership evangelism is to blame for the crisis. He says that the poor banks were bullied by the government into making bad loans, but all that would have been fine if not for the ripple effects caused by Fannie and Freddie’s stupid moves. And the fact that Fannie and Freddie were allowed to go hog wild? That wasn’t “deregulation” since they were government agencies (semantics again). Which is all more or less correct, but doesn’t address a few small problems: none of this proves that there wasn’t a market failure.

No one had to take out subprime loans. They could have read the fine print and then walked away. Banks could have found other ways of dealing with subprimes loans, recognizing the problems with Fannie and Freddie. Nothing suggests to me that Fannie and Freddie would have acted differently had they been private banks (except that they would have been more regulated as private banks). In other words: the government may have started the problem in motion. They definitely failed to stop the problem when they could have, and they seem to have made it worse. But they never did did anything that the market could not have stopped had the industry been “self-regulating.”

The two Reason articles are good, but they miss a big piece of the puzzle: the preemptive squashing of derivatives regulation in the 90s. In this case it is again not “deregulation” that was the problem – it was the lack of existence of regulation in first place. We were warned by congress, in no uncertain terms, what would happen back in 1994 but concerns were shouted down by anti-regulation ideologues in government, the industry, and the press. We were warned again in 2003 by Warren Buffet and still took no action.

None of this bodes particularly well for the government’s ability to regulate markets. But the idea that the financial industry can regulate itself has proven completely wrong, and no amount of spin and semantic games can change that. Unregulated free market capitalism has failed as socialism (or as some call it, “state capitalism”) is looking stronger than ever.

Meanwhile, the idea that economic freedom brings with it individual freedom has also been discredited by the persistent human rights abuses in Singapore (one of the most “economically free” places in the world) compared to the more economically regulated nation of Norway. You can’t make a convincing argument that strong civil liberties make for a strong economy, nor that economic liberty will necessarily result in civil liberty.

The battle between market economics and total state control (as played out between the US and the USSR) was only the beginning of a much longer struggle between many different economic policies that are neither strictly capitalist nor strictly socialist.

Those who still believe, as I do, in the virtue of open societies can no longer rely on practical arguments against the sort of extreme market regulation and lack of civil liberties found in countries like China. China’s technocracy has been too successful and the US’s dependence on markets too disastrous. We now must ask harder questions such as “what specific regulations make sense?”

Further reading:

Economic freedom? It depends where you stand

Who’s Afraid of Friedrich Hayek?

Markets and Anti-Markets in the World Economy

Two Old DeLanda Interviews

I actually thought I’d posted these before, but I can’t find them in the archives anywhere. They are older interviews, but they’re a good introduction to DeLanda.

From the Zero News Datapool:

Don’t call me Gaia. The Gaia hypothesis is a very interesting point. […] Philosophically, it is a terrible mistake. It is a terrible mistake precisely in the neo-materialist sense because it takes the metaphor of the organism, it sees life, living flesh as the most magical thing that happened on this planet. This is of course a chauvinism, a kind of organic chauvinism on our part. It takes the metaphor of the organism and applies it to the whole planet. Now the whole planet is alive, that what Gaia is. Not only do you call it an organism, you also give it a goddess name just to make sure you are ridiculous enough. The way out of this is to think that the planet is indeed something special, but it what Deleuze and Guttari called a body without organs, which is the exact opposite of an organism. It is a cauldron or receptacle of non-organic life, a body without organs. Because it can be alive in the sense of being creative and generating order without having genes or having organs or being an organism. In my view, the very fact that the atmosphere connected with the hydrosphere can generate things like hurricanes and cyclones and all kinds of self-organizing entities means that indeed the planet, even before living creatures appeared, was already a body without organs, a cauldron of creativity, a receptacle of spontaneously emerging order.

And here’s Erik Davis’s interview with DeLanda from Mondo 2000:

I have my shaman there, since I was like 19, this woman called Julietta. She is a direct heir of a long, long line of Mazatec knowledge.

I hate mysticism. I’ve always hated the whole idea of taking psychedelics and then going, “Western science is bullshit, let’s turn to Eastern philosophy.” I always strive to have a materialist explanation for what’s going on. I always thought that matter had much more to it than just this inert stuff that sits here. And now I’m being proved right.

Think about the Game of Life [computer-based cellular automata developed by mathematician John Conway]. At first the rules of interaction of the little cells in an abstract space were so simple that everybody thought it was a game. Then they found ladders and glider-generating guns spontaneously forming. So this tiny, abstract, stupid space all of a sudden began exploding with possibilities.

DeLanda’s Markets and Anti-Markets series

For those unfamiliar with him, this interview serves as a good introduction.

Markets, Antimarkets and Network Economics.

Markets and Antimarkets pt. 1.
Markets and Antimarkets pt. 2.
Markets and Antimarkets pt. 3.
Markets and Antimarkets pt. 4.

Markets and Anti-markets in the World Economy.

Markets, Antimarkets and the Fate of the Nutrient Cycles.

Via the Manuel DeLanda Annotated Bibliography.

Old Manuel DeLanda Interview

Now I know why Abe’s always talking about this guy:

“Instead of the peasant that shows up to the market to sell a certain amount of corn, here you have a wholesaler with a huge warehouse where he stores all the corn he can. If the prices are too low, he can always with drawn certain amounts from the market, put them in the warehouse, and artificially make the prices go up. When the prices go up, he then sells the rest of the corn at these high prices and he makes a lot of money. But, of course, he is manipulating demand and supply. He is not being governed by these anonymous forces. He is not being subject to self-organization; he is organizing everything in a planned cunning way. And so, because economists use the word “market” to describe both, that is one of the main confusions I see in contemporary thought.

We need another word to describe these organizations that are large enough to manipulate markets. A word has been suggested by historian Fernand Braudel and it is a very simple one: “anti-market.” Why? Because they manipulate markets. And so today, in the United States, there is a very strong political movement, mostly by the right wing, and Newt Gingrich is perhaps the most well known politician in this regards, who are trying, as they say, shrink the size of the government, let market forces have more room to operate. But, of course, translated into the terms we?ve just introduced, what they really want to do is let anti-market forces run wild. They don?t really want small producers and small manufacturers and bakers and printers and mom-and-pop shops to have more room to manoeuver and make money. They want national and international corporations to have more room to manoeuver. They want to shrink government so that there are less regulations to keep international and national corporations from doing what they want.

Zero News Datapool: An Interview with Manuel de Landa

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