01/10:Milton Friedman and the Rise of Monetary Fascism-The Dark Age of Money

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October 24, 2012

Milton Friedman and the Rise of Monetary Fascism

The Dark Age of Money

by JAMES C. KENNEDY

If you often wonder why ‘free market capitalism’ feels like it is failing despite universal assurances from economists and political pundits that it is working as intended, your intuition is correct.  Free market capitalism has become a thing of the past.  In truth free market capitalism has been replaced by something that is truly anti-free market and anti-capitalistic.  The diversion operates in plain sight.

Beginning sometime around 1970 the U.S. and most of the ‘free world’ have diverged from traditional “free market capitalism” to something different.  Today the U.S. and much of the world’s economies are operating under what I call Monetary Fascism: a system where financial interests control the State for the advancement of the financial class.  This is markedly different from traditional Fascism: a system where State and industry work together for the advancement of the State.

Monetary Fascism was created and propagated through the Chicago School of Economics.  Milton Friedman’s collective works constitute the foundation of Monetary Fascism.  Knowing that the term ’Fascism’ was universally unpopular; Friedman and the Chicago School of Economics masquerade these works as ‘Capitalism’ and ’Free Market’ economics.

The foundation of Friedman’s corrupting principle is that the investor (money to be more precise) has no duty, obligation or covenant to anyone or anything.  Friedman’s ‘Market’ is not subject to ‘any’ human standard of morality, political limitations or national interests.  Money is free to act without bounds or conventions.  Nothing is prohibited as long as the market can provide a “clearing price”.

The fundamental difference between Adam Smith’s free market capitalism and Friedman’s ‘free market capitalism’ is that Friedman’s is a hyper extractive model, the kind that creates and maintains Third-World-Countries and Banana-Republics, without geo-political borders.

If you say that this is nothing new, you miss the point.  Friedman does not differentiate between some third world country and his own.  The ultimate difference is that Friedman has created a model that sanctions and promotes the exploitation of his own country, in fact every country, for the benefit of the investor, money the uber-wealthy.  He dressed up this noxious ideology as ‘free market capitalism’ and then convinced most of the world to embrace it as their economic salvation.

As improbable as it sounds, this ideology has the near-universal support of most economists, the media, universities, the Federal Reserve, the U.S. Treasury, nearly every member of The U.S. Congress and most everyone you know.  Today Friedman’s ideology is accepted, to some degree, by nearly every country in the world.  But ultimately this exploitive model is not sustainable at any level, or for anyone or any nation.

The ultimate difference between Friedman’s ideology and Smith is simply this: Smith was in fact a Mercantilist.  True, he opposed the custom of hording gold and other Mercantilist practices, but ultimately he was a Mercantilist. Smith promoted “free trade” with the goal of improving the English merchant’s advantage, and thus the State’s.  Nothing expresses this more clearly that the title of his book An Inquiry into the Nature and Causes of the Wealth of Nations.  Mercantilism is based on the relative wealth of one Nation State over the other, not the plunder of the State and it’s peoples for the benefit of the individual.

Smith believed in the power of the State and recognized that it was only by the power of the State that free enterprise could succeed and thrive. In a world without the State, he sided with Lock, “life was brutish and short”.  Consequently one had obligations to the State and the people who make up the state: the working man.

According to Smith every butcher, baker, craftsman and merchant would seek out his own self-interest and that economic advantage would ultimately benefit his fellow Englishman and the Crown.  Smith’s arguments against some precepts of Mercantilism were intended to give the English tradesman a greater advantage, nothing more.  The intended effect was to enrich one’s State above all others as an alternative to the primitive act of war, the traditional means to National enrichment.  Smith viewed things as a zero sum game.  And as England was the undisputed master of global exploitation at this time, exploitation of other Nations was fair game.

However, according to Economist David Ricardo trade between nations of relative economic parity result in what he termed “Comparative Advantage”.  Comparative Advantage is based on specialization: Germany builds machine equipment, Italy does leather goods, France produces cheese, wine and literature.  When these nations trade with each other all parties enjoyed a net gain as a result of specialization and non-duplication of resources.

Of course this does not work when first world nations off-shore factories and jobs into subsistence-based economies (the term “comparative” is no longer germane).  Off-shoring into non-comparative economies is purely extractive because all of the gains are ‘privatized and are no longer correlated to national interests.  Non-Comparative off-shoring undermines both the host and source/flagship nation.

The financial entity is able to extract environmental, capital, tax and infrastructure concessions from the host nation.  If the host nation ever seeks to renegotiate its position with the financial entity the entity can enlist the powers of its flagship nation (i.e. State Department).  This type of intervention can be very costly to the flagship nation and end very tragically for the host nation.  Under Monetary Fascism the financial entity maintains out-sized rents from the host nation by utilizing the state as its enforcement agent, while maximizing tax avoidance via off-shore corporations (and other gimmicks).

Free market capitalism, as conceived by Smith, was Nationalistic in nature and as the Nation State became wealthier, so did its people and industry.  This relationship required shared obligations and shared rewards between the State and its people.

Traditional Fascism, as conceived by Mussolini or Hitler, had an aggressive Nationalistic disposition where the State promoted Industry above all others in order to strengthen the State relative to its perceived rivals.  Hitler and Mussolini believed that as the State lifted industry, industry lifted the people – dignity and pride in one’s nation were foundational principles.

Monetary Fascism, as conceived by Friedman, uses the powers of the state to put the interest of money and the financial class above and beyond all other forms of industry (and other stake holders) and the state itself.

In democracies and first world nations this is achieved through lobbying, campaign donations, financial incentives, revolving door regulators and through other means.  As such, the state is coopted into altering regulations / legislation, diverting investigations / prosecutions or creating tax loopholes for the benefit of the financial class/ industry.  Ultimately these actions undermine states sovereignty.

For the rest of the world state interests and sovereignty are undermined through the IMF, The World Bank and other global monetary agencies.

Monetary Fascism has a strong preference for political rather than capital investments.  These  investments are designed to sustain and support the preferences and activities of the financial class as it manipulates and create ever larger out-sized rent opportunities or constructs risk-diverting transactions that aggregate a ‘risk-arbitrage premium’ to one side of a transaction and transfers all future losses to the other.

On a global basis Friedman’s ideas heavily influence international treaties on taxation and capital flows with the single minded goal of freeing capital from any obligation to the host or origin country.  These agreements have essentially created a virtual nation, or non-nation, of money that is ultimately beyond the reach of the conventional Nation State.  Friedman’s ‘invisible hand’ is free to extract the wealth of any corporation or Nation without any reciprocal obligations.

The Serene Insurrection of Money

All economic theories are devised to fill a need; to justify public and / or private actions. With the rapidly growing profits to the financial class during the divestment era, beginning in the early 1970s and continuing today, they needed some ideological justification for what they were doing (selling out America’s future and destroying corporations and jobs for quick profits) so they found and embraced Monetary Fascism. In fact, they found each other: Friedman was just ‘fulfilling a need in the market place’. Friedman simply created a new ideology that justified what the financial class was doing.

Rationalizing the divestment of an entire economy is morally deplorable, but it also offered “out-sized” profit opportunities on a massive scale.  Seeking relevance in this sweeping tide of economic-cannibalism other academics rushed into the water.  None bothered to consider the long term consequences that would result from the wholesale dismemberment of our industrial economy.  Instead academics suddenly ‘discovered’ an implausible utopian future that would be sustained by the creative powers of finance and trading our industrial heritage for a service economy.

Shocking? – no, the academic promotion of concepts, theories, historical narratives and the state of ‘fact’ and ‘science’ are increasingly available to the highest bidder.  Custom realities are also made-to-order ad nausea from within our Nation’s many tax exempt ‘think tanks’ that attempt to define public debate and guide public policy for the benefit of their patrons.

Milton Friedman and the Chicago School of economics claimed to have refined and developed modern,  scientific tools of ‘free market capitalism’, capable of unlocking ever greater rewards from Adam Smith’s simple, primitive concept of free markets.  Monetary Fascism was rapidly adopted because western culture recognizes the tremendous historical contributions of traditional free market capitalism and wanted to participate in the promise of these enhanced rewards.

In truth, it was nothing more than a cloak of deception – providing cover for the unscrupulous behavior of investment bankers, corporate raiders, speculators, off-shore corporation, debt mongers and bubble pushers (typically one and the same).  The enhanced rewards came from the pilfering of capital investments and technology from generations past, the liquidation of employees and off-shoring of production, the pilfering of pension accounts and the termination or spin-out of R&D departments and option packages to executives and directors that focused on short term stock price targets.

Bell Labs, once part of AT&T, laid the foundation for all modern telecommunication and electronics technology today was morphed into Lucent Technology.  Lucent quickly looted the legacy portfolio of Bell Laboratories to enrich themselves and shareholders, leaving a worthless shell that was eventually merged with Alcatel.

Wall Street Investment Bankers, leveraged buyout firms and hedge funds became the Paladin Knights of the ’free market’ whose allegiance was to the ‘noble shareholder’, markets and liquidity.  In truth the shareholder was/is nothing more than a nameless, faceless transient in an endless pursuit of ever larger ‘outsized returns’.  Traditional capital formation was replaced with financial schemes designed to acquire existing asset for liquidation, management and directors traded long term management discipline for short term performance and accounting gimmicks tied to stock and option pricing.  With most of the IPO capital used to pay for the exit of early investors, the stock market has become nothing more than a series of game theory type exit strategies.   The equity markets are a failed forum for the creation of productive or capital intensive projects.  See Failed Capital Markets.

However, the larger system failure at the nation and global level stems from the perversion of the public and private debt market.  This was made possible through massive decade’s long deregulation and the post 2008 financial crisis.

The entire 2008 financial crisis lies at the feet of The U.S. Congress.  When The U.S. Congress repealed the Glass Steagall Act, passed in response to the Great Depression, they eliminated any meaningful financial oversight within the Banking and Investment Banking industry.

Why did the U.S. Congress change the law that protects our economy from a second 1930s type depression?  Simple, it was campaign contributions (shit-loads of cash, considered bribes or worse in the private sector), filling the top post in the Fed, Treasury and the Administration with top level executives from Goldman and the like and the prospects of private sector jobs in the financial industry for pliable regulators, retired Members of The U.S. Congress and former Presidents.

It was from the decades-long cash infused orgy of conflicted interest that Congress finally entrusted the financial industry with “self-regulation.” If you believe the rhetorical record, deregulation was intended to unleash the ‘wealth creating powers’ of these new financial instruments created through the pure genius of the investment bankers.

Alan Greenspan and others saw no limits to the potential economic contributions of the financial markets – if they could only be freed of unnecessary and burdensome regulations.

This wanton deregulation allowed the financial industry to create trillions of dollars in unregulated CMOs and CDSs (CMO: Collateralized Mortgage Obligations – packages of high risk mortgages that were rated AAA & CDS: Credit Default Swaps – bogus insurance on junk paper like CMOs) and other complex derivatives, hypothecated derivatives, synthetic derivatives, even hypothecated synthetic derivatives and the ‘black pools’ of unregulated capital that created and priced these complex financial instruments.

This resulted in the unprecedented and unsustainable accumulation of debt and related derivative instruments, literally in the hundreds of trillions of dollars, dwarfing global GDP by a number of factors, controlled by unregulated and uninhibited bankers.  Ultimately it has cost most nations their sovereignty.

Monetary Sovereignty and the Death of Nations

Friedman’s model of wealth extraction has been in conflict with the traditional Nation State and the concept of State sovereignty from inception.

Great, you say!  The state is evil and must be replaced with something new.  Beware of this thinking.  The evils of the state are nothing when compared to the money-counter.  The State must answer to the public, or at least the mob.  The money-counter only answers to his insatiable desire for more and more money.

Friedman’s ideology undermines State sovereignty by initially delinking the aggregation of wealth from the interest of the state.  As wealth accumulates it is then used to alter political outcomes, tax avoidance and financial regulations for the benefit of the wealthy.  Throughout history the State has always jealously protected its sovereignty.  So how did this ideology survive and eventually overtake the State.

Easy, they co-opt everyone.  First the academics and think tanks then one political party after the other.  The media was consumed and consolidated by large corporate conglomerates who quickly enforced their own interest’s at the editor and programmer’s desk. Then they locked in the entire public through 401(k)s and savings plans.  Even the unemployed and the unemployable qualified for credit cards, new cars and even homes. At the national and global level they expanded public and private debt everywhere.  They made everyone feel richer for a short time.  At the same time the financial industry off-shored, liquidated, crowded out and displaced the traditional industry of our economy.

With the introduction of Monetary Fascism financial actives as a percentage of GDP grew from less than 5% in 1969 to more than 22% of GDP by 2008.  Over the same period U.S. manufacturing as a percentage of GDP declined from more than  26% to just 12%. Using historical measures 2008 GDP for the manufacturing sector would be considerably less than 10%. Only the federal government was consuming a larger portion of GDP at 35%.

Taking the number one spot in the U.S. economy, the finance industry has become the most influential player in government.  But the real power behind the finance industry is much deeper than just the political access that campaign donations buy, the financial industry has wide and deep influence throughout government policy via the Federal Reserve, Treasury, Fannie May, Freddie Mac, the FDIC, key advisory rolls in the Administration, Members of Congress, political appointments within the SEC,

CFTC, and membership on The Council on Foreign Relations and participation in global organizations like the G8, G20, Basil Accords, IMF and World Bank.

Through their unparalleled influence over the Administration, Congressional Finance Committees and the Federal Reserve they gained full control over the regulators.  In fact, it was the Allen Greenspan, Tim Geithner (Federal Reserve) Robert Rubin, and Larry Summers (the Administration) and others who silence ‘Rouge Regulators’ who attempted to alert The U.S. Congress to the potential risks of deregulation, dark pools and derivatives.  Greenspan, Summers, Rubin and others essentially staged a soviet era show trial against Brooksley Born and others, designed to send the message to any would-be-regulators that the rules no longer apply to the financial class.   It worked.

Once they controlled the regulators and the key members of the Congressional Finance Committee they were free to alter accounting standards, create complex financial vehicles, and leverage risk in derivatives while real losses accumulated to staggering and globally disruptive levels. They hypothecated CMOs and even synthetic CMOs to unsupportable levels, papering over any potentially observable warning signs with zero-collateral CDSs.

The real risks to global finance were hidden in the derivative instruments related to the massive debt portfolios controlled by the “Too Big To Fail” banks with unprecedented political power.  These banks were not subject to any measurable regulatory restriction.  Point of fact, Goldman Sachs and others were able to morph into traditional Prime-Banks overnight, with the blessing of their regulators, instantaneously gaining unlimited access to the Discount Window.  The act is so egregious that the public is incapable of cognition, while the media, academics and think tanks collectively remain silent.

Unlimited access to the Discount Window was not enough.  Investment Banks and the overall financial industry enjoy unlimited government largess in the form of Quantitative Easing, immunity from prosecution, as it relates to fraudulent financial instruments such as CMOs, CDSs & assorted derivatives, front running client accounts, pilfering of client accounts, wholesale asset sweeps from failed banks to failing banks and even the wholesale world-wide manipulation of LIBOR.

The final act of treachery was delivered by the U.S. Supreme Court who imbued ‘money’ with a voice and electoral powers.  This decision treated each and every single dollar in circulation as a prospective voter.  In the hands of an ordinary citizen the dollar’s ultimate voice is limited to $2,500 per person per candidate.  But in the hands of a corporate controlled Super-PAC the dollar’s voice is virtually unlimited.

The Financial Sector invested more than $5 billion in campaign contributions and lobbyists from 1998 to 2008.  As if $5 billion was not sufficient, the new Supreme Court Ruling and the creation of Super PACs will create a financial Tsunami Effect on politics.

Super PACs may raise and spend unlimited sums of money from individuals, corporations, associations, and other interest groups to “overtly” advocate for political candidates.  A recent example of how disruptive this is demonstrated by Sheldon Adelson and his wife’s $10 million contribution to Newt Gingrich.  The Aelson’s ‘legal’ Super PAC contributions were able to keep ‘their candidate’ in the Republican Primary single handedly.  Gingrich had no meaningful support beyond this single patron.  Democracy?  Representative government?

This decision effectively abolished our representative form of government.  Again, this act of treachery did not spark any meaningful discussions from academics, constitutional scholars, think tanks, civil rights groups or the media. Why?  They have all been co-opted.

Today the power of the State blindly serves the interest of these banks at the expense of all others.  I am not claiming that this needs to be a preconceived conspiracy. To the contrary, the outcome was inevitable.  Without any restraints most growth oriented systems, such as a virus, tend towards uninhibited growth.  With no means of restraint, equilibrium becomes impossible.  The single-minded focus on the growth of money compromises all other systems in the economy.

Any U.S. political leader who puts forward a Nationalist agenda is pillared as an opponent of ‘free trade’ and a danger to ‘free markets’.  A perfect example is the U.S. Congressional and Administrative reaction to traditional Industrial Policy initiatives.  The universal reaction is to characterize any U.S. Industrial Policy initiatives as “anti-free trade” and un-American.  This is wrong on both counts: Adam Smith’s entire argument about free trade was intended to enhance England’s Industrial Policy.  It is also a fact that the U.S.’s industrial greatness was rooted in 200 years of government directed, supported or sponsored Industrial Policy.

The press and pundits also contribute to this reversal of reality when they recently questioned Obama’s commitment to capitalism and free trade because he criticized Mitt Romney’s “Off-Shoring” of U.S. jobs as the head of Bain Capital.  According to the press and pundits off-shoring is a foundational principle of ‘free markets’, but off-shoring has no basis whatsoever in Smith’s free markets.  Off-shoring as we now employ it technically does not fit with Riccardo either, as Riccardo’s arguments of Comparative Advantage pre-suppose reciprocation of trade between relatively equal partners.

Historically governments would use tariffs or other measures to balance out large deviations between un-equal or undesirable trading partners.  Today corporations and the financial industry pocket these out-sized ‘comparative disparities’.  Eventually this results in wide spread unemployment and dislocation inside the flagship/host-country and all of these accumulated costs simply become a burden of the state.

This is nothing more than arbitraging disparity and transferring the resulting collateral costs to the state.  As the unemployment and dislocation costs to the state threaten the asymmetric relationship between the state and the financial class, the financial class promotes austerity through its various think tanks, financially sponsored academics and loyalist inside Congress and the Administration.

Outside the U.S. it is the IMF, the World Bank and various international trade and financial trade and monetary agencies including the EU that promote austerity.

Today the financial and banking class enforces this ideology through the media and government with the same ruthlessness of the Church during the Dark Ages: to question is to be a heretic.  It is a much more sinister form of excommunication for any public figure who does not accept or property articulate his allegiance to Friedman’s poisoned ideology.

Consequently, it is a sad fact that both Democrats and Republican Members of Congress wear Monetary Fascism on their sleeves – out of conviction or fear.   Both parties have become slaves to this deadly ideology.

Global Contagion

Challenging Monetary Fascism is much more dangerous for political leaders representing countries outside the G-20.  Populist leaders who put forward Nationalist policies are automatically in violation of one or more international ‘free trade’ agreements.  Non-conformity with these agreements ultimately results in trade sanctions, IMF or World Bank imposed austerity, or worse…

Friedman’s ideology is global and his rules of ‘free trade’ are deeply integrated into the laws of international trade.  All of our Nation’s international treaties on trade and banking are a series of interlocking agreements that force all nations to subvert their sovereignty and conform to Monetary Fascism.  It is a global pandemic built on a world-wide transmission system with universal powers of enforcement.  Sovereign Nations comply or they lose their credit rating.  Considering the world wide mass escalation of debt to GDP for most western nations, a small increase in the cost of borrowing would easily result in default and bankruptcy.

Today, Nation States face nothing less than financial Armageddon – the Sampson Option, if they do not comply with the demands of the global banking industry.  And it is with this weapon that the Financial Class has come to dominate the State.

Forget Al Qaeda, the only legitimate threat to U.S. and international security is the financial class.  They have created Weapons of Mass Financial Destruction (Financial WMDs) and they stand ready to take down the world economy.  They are more dangerous than any ‘terrorist group’, or even all of the ‘terrorist groups combined.

Exaggeration – consider what Friedman’s ‘free market’ banking system has done to Iceland, Ireland, Spain, Greece, Estonia, etc.  How many western nations has Islam overthrown?  Not one, and by comparison that should scare you.

Money has become the state and the traditional state is forced to serve money’s interests.  Everywhere the Financial Class is openly lording over sovereign nations.  Ireland, Greece and Spain are subject to ultimatums and remember Hank Paulson’s $700 billion extortion from the U.S. Congress.  The $700 billion was just the wedge.  Thanks to unlimited access to the Discount Window, Quantitative Easing and other taxpayer funded debt-swap bailouts the total transfers to the financial industry exceeded $16 trillion as of July 2010 according to a Federal Reserve Audit.  All of this was dumped on the taxpayer and it is still growing.

Why must the people of Ireland or Iceland accept the losses of the private banking sector as a public obligation?  Why must Greece accept austerity because its politician’s entered into a series of deals structured by Goldman Sachs specifically designed to deceive its EU partners?  If Goldman Sachs authored documents with the intent of fraud then Goldman Sachs is required to bear the losses and prosecution.  The taxpayer had no hand in this.

It is breathtaking.  Within the last 40 years ‘money’ has gained total control of each and every one of us.  Generations to come will enter this world burdened with the debts of their fathers.  It is inescapable and ubiquitous.  More than just a spider’s web, or a money-sucking vampire squid, it is a global pandemic that infects our very DNA.  It is the Original Sin of money – subject to compound interest, converted into a derivative, hypothecated and rolled into a CMO and then leveraged through CDSs.

The uber-wealthy will continue to aggregate wealth.  The banking system will continue to make ‘risk free bets,’ booking gains and shifting the losses to the public.  As these losses accumulate on the public balance sheet the state will be forced to seek austerity measures from the public. As austerity and debt levels increase the global economy will continue ‘circling of the bowl’ with increasing speed until we suddenly plunge into the vortex.

All Bow to the Welfare Queen

Total governmental transfers and assumed liabilities related to U.S. financial institutions since 2008 exceed the entire history of all social welfare programs for all free world economies collectively since Bismarck (do the numbers, its true).

So, how is it that history’s biggest welfare queen can demand that the rest of human society be forced to take responsibility for its prolific reproduction of trillions of dollars in derivatives and other financial abominations in the name of ‘free markets’?  Easy, your government has surrendered its National Sovereignty.  Representative government has ended. The public’s misconception and blind acceptance of Friedman’s ideology as a legitimate form of capitalism is precisely what makes Monetary Fascism immune from any true political recourse.

It is the classic case of failing to properly identify the true nature and source of a contagious epidemic.  This is the hidden strength of Monetary Fascism.  Failure to identify the source of the disease or its mode of transmission assures continued contagion, misdiagnosis and mistreatment.

The public’s support for Friedman’s poisoned system is based on the past success of true capitalism and free markets as surmised by Smith.  Most U.S. Citizens desperately want to regain our Nation’s former prestige.  Because they cannot differentiate Smith’s system from Friedman’s they see government restrictions on business, taxes and capital flows as the obstacle to achieving our previous economic greatness.  The public can be counted on to demand even greater deregulation, undermining their relevance in the system and our Nation’s economy and sovereignty.

Whole industries have long ago disappeared.  Friedman’s Monetary Fascism has burnt through most of what remains of the middle class.  Seeking fuel, the fire has spread to the upper middle class and the lower middle class. Small businesses and Unions are consumed in the flame.  Even the ranks of the finance industry were offered up to the god of money.  Tens of thousands of recently dispossessed upper middle class and the lower ranks of the wealthy find themselves without meaningful work and dark prospects.   All of these people have passed through the bowels of Monetary Fascism, yet they stand up and defend ‘free markets’ so that they can be consumed once again as this raging fire seeks new fuel.

The only rational defense is for people everywhere to denounce Friedman’s ideology in all public policy debates and academia, and to articulate the true principles of Adam Smith.

Ending the tyranny of Monetary Fascism begins with the wide spread recognition that it is the anti-theses of capitalism, free markets, individual self-determination and national sovereignty.  However, it is truly unstoppable as long as the world continues to view it as the embodiment of Adam Smith’s “free market capitalism”.

Until then, the plunder will continue, lives will be discarded the angry mob will continues to grow.  As we approach critical mass the fear is setting in.  The remaining upper middle class and middle class fear losing what they have, while the recently disenfranchised desperately cling to their faith in Friedman’s ‘free markets’ in the hopes of redemption.  The faithful double down on their own demise, while the ranks of the dispossessed swell.  Every one of us has become a bit player in our own tragedy.

We are at the end of human evolution, we have become chattel.  We are conditioned to the service of those with money, who only seek to enlarge their store of money, to beget money, for money’s sake and nothing more.  The future is grim.

The predictable long term outcome is a steep decline into a very dark Monetary Feudalism.

When asked in an interview what humanities’ future looked like, Eric Blair, better known as George Orwell, said “Imagine a boot smashing a human face forever.”

Welcome to the Dark Age of Money.

James C. Kennedy is an economic consultant.

http://www.counterpunch.org/2012/10/24/the-dark-age-of-money/

서브프라임모기지와 유동화증권 및 파생상품거래와의 관계   이제 모기지 관련 금융거래의 구조에 대해 알아보도록 하겠습니다.

모기지 론 취급기관은 대출을 해 준후 그 대출금을 회수하기까지 장기간이 걸리므로 자금조달에 어려움이 생깁니다. 그러나 대출을 해 주고 원리금을 받을 수 있는 권리를 기초로 증권을 발행하여 금융시장에 팔게 되면 대출금 회수 전이라도 자금을 조달할 수 있게 되겠죠.

즉 (1)모기지 취급기관은 대출금 원리금을 받을 수 있는 권리를 자산유동화회사에 넘깁니다.

(2)자산유동화회사는 이러한 대출 원리금을 받을 수 있는 권리를 기초로 증권을 발행하여 자금을 조달하고 이 자금을 모기지 취급기관에 공급합니다. 이 증권을 주택저당담보부증권(MBS ; Mortgage Backed Security)이라 하죠.

(3)여러 금융기관이나 투자회사는 주택저당담보부증권 등을 기초로 하여 부채담보부증권(CDO ; Collateralized Debt Obligations)을 발행하여 다른 투자회사나 헤지펀드에 판매합니다.

(4)투자회사나 헤지펀드 등 투자자들은 여러 파생금융상품에 투자하여 자금을 공급하고 필요시 회수합니다.

한편 위에서 설명한 부채담보부증권은 여러 가지 담보자산을 신용등급별로 나눠 위험의 정도에 따라 수익률을 다르게 한 파생금융상품입니다.

고수익을 추구하는 헤지펀드나 투자회사들은 당연히 위험도 높고 수익률도 높은 증권에 많은 투자를 하겠죠.

또한 여기에 보험의 기능을 추가하고 각종 권리를 사고 팔 수 있게 하여 채무불이행 위험에 대비할 수 있도록 만든 신용불이행스왑(CDS ; Credit Default Swap) 등의 복잡하고도 알기 어려운 각종 신용파생상품이 만들어져 금융거래가 이루어지고 있습니다. 결국 모기지 론의 부실은 위의 (1)～(4) 단계를 거친 모든 당사자와 국가에 직간접적으로 영향을 미치고 있습니다.

Fannie Mae Vs Freddie Mac: What Are They?

연방저당권협회(FNMA : Federal National Mortgage Association )의 약칭

연방저당공사증권 [Fannie Mae], 혹은 연방주택대출저당공사(FHLMC)에 의해 발행되는 증권

By BankingMyWayStaffA lot as been made of the role mortgage giants Fannie Mae (Stock quote: FNM) and Freddie Mac (Stock quote: FRE) have played in the current economic crisis, but many Americans have little understanding about what these two entities are and how they affect the housing market. Understanding the purpose and function of Fannie and Freddie is essential to understanding what has happened in the mortgage market.

A lot as been made of the role mortgage giants Fannie Mae (Stock quote: FNM) and Freddie Mac (Stock quote: FRE) have played in the current economic crisis, but many Americans have little understanding about what these two entities are and how they affect the housing market. Understanding the purpose and function of Fannie and Freddie is essential to understanding what has happened in the mortgage market.

Fannie Mae, the common name for the Federal National Mortgage Association (FNMA), and Freddie Mac, the common name for the Federal Home Loan Mortgage Corporation (FHLMC), are both congressionally authorized government-sponsored enterprises (GSEs). They are hybrids in that they are privately owned by shareholders but enjoy government backing. The U.S. Department of Housing and Urban Development (HUD) is charged with regulating both Fannie and Freddie.

The mission of Fannie and Freddie is virtually the same -- "to provide liquidity and stability to the U.S. housing and mortgage markets," according to the Fannie Mae web site, and "to provide liquidity, stability and affordability to the housing market," according to the Freddie Mac web site. They both pursue this mission buy purchasing residential mortgages that conform to certain standards from lenders. They then either hold these mortgages or use them to issue mortgage-backed securities to be traded in the capital markets. Currently, Fannie and Freddie hold or guarantee about 50% of the nation’s outstanding home mortgages.

The major difference between these two enterprises is in how and when they were created. Fannie Mae was created in 1938 during the Great Depression. Originally it was a government agency charged with making mortgages more affordable for low-income families to help improve the economy. It was made private in 1968 at which time it stopped guaranteeing government-issued mortgages. In 1970, Congress created Freddie Mac to help improve the secondary mortgage market by adding competition. Freddie has always been a privately owned company, but it still enjoys the same government backing as Fannie Mae.

Fannie and Freddie do not operate directly with consumers. Their role is to work only with lenders in the secondary market. Consequently, most homeowners do not know if Fannie or Freddie owns their home loan. A large percentage of conforming mortgages are owned by Fannie or Freddie, however.

The major problems with Fannie and Freddie started as a result of falling home prices and rising mortgage defaults. Because lenders could depend on Fannie and Freddie purchasing their mortgages, lending standards were severely relaxed. Consequently, many borrowers who could not conservatively afford mortgages received them anyway often using subprime and exotic loans. When these borrowers began to default on their mortgages, the housing market began a downward spiral. Because all of Fannie and Freddie’s assets are tied to mortgages, these two firms suffered major losses. In September 2008, the government initiated a rescue plan to deal with Fannie and Freddie and prevent these two firms from failing. Both firms were placed into the conservatorship of the Federal Housing Finance Agency (FHFA). U.S Treasury promised capital support of up to $100 billion for each firm in exchange for $1 billion of senior preferred stock with a 10% coupon.

Recently, the administration announced the Making Homes Affordable program targeted at preventing foreclosure. This program is available for Fannie and Freddie mortgages and offers a refinancing opportunity for homeowners who owe more than 80% of their home’s current value.  By refinancing at lower interest rates, monthly payments will decrease. Homeowner’s can check with their mortgage servicers or with Fannie or Freddie directly to see if they are eligible.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

미국 예금보험공사

Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an agency of the U.S. government that insures deposits in banks and thrift institutions, supervises the risks associated with these insured funds, and limits the repercussions on the economy when a bank or thrift institution fails.The FDIC was created in 1933 as a result of the bank failures that occurred during the Great Depression.

How It Works/Example:

The FDIC insures up to $100,000 of the following kinds of deposits at FDIC-insured banks and thrifts.

• Checking accounts (including money market deposit accounts)

• Savings accounts

• Certificates of deposit (CDs)

• Certain retirement accounts on deposit at a bank

CoverageThe type of account a depositor holds affects the amount of FDIC coverage he or she may have. For example, let's assume you have three separate accounts at Bank XYZ: a checking account holding $10,000, a second checking account holding $50,000, and a $60,000 CD, for a total of $120,000 on deposit.If the accounts are all single accounts (single accounts are deposit accounts owned by only one person), then the FDIC adds the account balances together and insures the total up to $100,000. In our example, that means $20,000 of your deposits are uninsured.The situation changes if you hold the accounts jointly with another person. Because the other person has a right to withdraw money from the account, his or her share is separately insured by the FDIC. This means that in our example, your half of the accounts ($120,000/2 = $60,000) would be insured up to $100,000 and the co-owner's half (the other $60,000) would also be insured up to $100,000. No portion of the accounts would go uninsured.Alternatively, the FDIC insures certain trust accounts up to $100,000 for each qualifying beneficiary (spouses, children, parents, siblings, grandchildren). The coverage applies to beneficiaries who get the account's assets only when the owner dies. Thus, if you held the $120,000 in a trust for your three grandchildren, the full $120,000 would have FDIC insurance because each beneficiary would be insured up to $100,000.It is important to note that FDIC coverage is $250,000 per depositor in the case of certain retirement accounts. Thus, if your $120,000 were in one or more self-directed retirement accounts, then those account balances would be added together and insured up to $250,000 (leaving no uninsured balance).AdministrationThe FDIC insures the deposits of a bank chartered by a state or federal government. A state-chartered bank has a choice of whether to join the Federal Reserve system; if the bank chooses not to join, the FDIC becomes the bank's primary regulator rather than the Federal Reserve. The FDIC examines and supervises roughly half of the banking institutions in the United States to make sure they are solvent and are complying with banking regulations.When a bank or thrift institution fails, the bank's chartering authority shuts it down. Then, the FDIC usually sells the deposits and loans of the failed bank to another bank, and the failed bank's customers become customers of the purchasing bank. Usually, customers notice no difference in their accounts, but when a buyer can't be found, the FDIC reimburses depositors for their principal and accrued interest up to the insurance limit. This usually occurs within a few days of the bank's failure.

신용부도스와프 [ Credit Default Swap , 信用不渡- ]

부도가 발생하여 채권이나 대출 원리금을 돌려받지 못할 위험에 대비한 신용파생상품.

영문 첫글자를 따서 CDS라고 하며, 부도의 위험만 따로 떼어내어 사고파는 신용파생상품이다. 예를 들면, A은행이 B기업의 회사채를 인수한 경우에 B기업이 파산하면 A은행은 채권에 투자한 원금을 회수할 수 없게 된다. A은행은 이러한 신용위험을 피하기 위하여 C금융회사에 정기적으로 수수료를 지급하는 대신, B기업이 파산할 경우에 C금융회사로부터 투자원금을 받도록 거래하는 것이다.이러한 신용파생상품은 1990년대 중반 투자은행들이 신흥 경제국에 투자하는 데 따르는 신용위험을 다른 투자기관으로 이전하려는 목적에서 비롯되었으며, 2004년 이후 활발하게 거래되었다. 채무자로서는 자금을 조달하기 쉽고, 채권자로서는 일종의 보험료를 지급하면서 채무불이행으로 인한 위험을 방지할 수 있는 것이 장점이다.그러나 채무자인 기업이 부도가 날 경우 보증인 격인 금융회사에 손실이 발생하고, 이로 인하여 금융회사가 부실해지면 채권자인 은행도 연쇄적으로 부실화된다. CDS 물량이 한꺼번에 쏟아져 나올 경우 자금조달 시장이 마비될 우려가 있으며, 실제로 이는 서브프라임 모기지론 사태로 촉발된 미국의 금융위기를 증폭시킨 요인으로 지적된다.

[출처] 신용부도스와프 | 두산백과

►►	'Age of Greed' author Jeff Madrick on the GOP's ... current.com2011년 8월 23일 The Washington Post: Book review: 'Age of Greed' by Jeff Madrick ... at The Roosevelt Institute, and ...

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present

by Jeff Madrick

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present 3.84  · 

A vividly told history of how greed bred America’s economic ills over the last forty years, and of the men most responsible for them.

As Jeff Madrick makes clear in a narrative at once sweeping, fast-paced, and incisive, the single-minded pursuit of huge personal wealth has been on the rise in the United States since the 1970s, led by a few individuals who have argued that...more A vividly told history of how greed bred America’s economic ills over the last forty years, and of the men most responsible for them.

As Jeff Madrick makes clear in a narrative at once sweeping, fast-paced, and incisive, the single-minded pursuit of huge personal wealth has been on the rise in the United States since the 1970s, led by a few individuals who have argued that self-interest guides society more effectively than community concerns. These stewards of American capitalism have insisted on the central and essential place of accumulated wealth through the booms, busts, and recessions of the last half century, giving rise to our current woes.

In telling the stories of these politicians, economists, and financiers who declared a moral battle for freedom but instead gave rise to an age of greed, Madrick traces the lineage of some of our nation’s most pressing economic problems. He begins with Walter Wriston, head of what would become Citicorp, who led the battle against government regulation. He examines the ideas of economist Milton Friedman, who created the plan for an anti-Rooseveltian America; the politically expedient decisions of Richard Nixon that fueled inflation; the philosophy of Alan Greenspan, on whose libertarian ideology a house of cards was built on Wall Street; and the actions of Sandy Weill, who constructed the largest financial institution in the world, which would have gone bankrupt in 2008 without a federal bailout of $45 billion. Significant figures including Ivan Boesky, Michael Milken, Jack Welch, and Ronald Reagan play key roles as well.

Intense economic inequity and instability is the story of our age, and Jeff Madrick tells it with style, clarity, and an unerring command of his subject.(less)

Hardcover, 480 pages

Published May 31st 2011 by Knopf

 http://www.goodreads.com/book/show/9800776-age-of-greed#

Jeff Madrick on How Wall Street Won and America Lost

POSTED: June 24, 3:04 PM ET | By Julian Brookes

Courtesy of JeffMadrick.com

In his latest book, Age of Greed, former New York Times economic columnist Jeff Madrick tells how Wall Street triumphed and America paid the price. It's the story of how, starting in the 1970s, right-wing economics – a mystical cult centered on small government, low taxes and financial deregulation – and human greed teamed up to produce not shared prosperity but obscene economic inequality and financial instability, through the ideas and doings of a bipartisan roster of politicians, financiers, and economists, some obscure, others prominent (hello, Robert Rubin, Larry Summers!). We recently got him on the phone to talk about the triumph of finance and the decline of America in our age of greed.

Q.In the book you say the roots of our economic troubles are in the 1970s. What happened in those years?

The American people turned against government, and the catalyst was the confusing and painful period of high unemployment and high inflation that struck harshly in 1973 and didn't really subside until 1980-81.

Q.And right-wing politicians and economists blamed government.

The right wing claimed the government had become too big, that deficits caused the problem, and that the Federal Reserve had allowed the money supply to run amok. And this idea got ingrained in the public imagination and in the media. America began to doubt government, and that opened the door for business to abuse regulation and change regulation, a chance for right-wing politicians to get more power.

Q.But you point out in the book that government wasn’t all that large at the time.

Government wasn’t very big, and federal budget deficits were much smaller, as a proportion of GDP, under Carter than they were under Ronald Reagan, when inflation was falling.

Q.But the idea took hold anyway that government was the problem and deregulated markets the solution.  And Milton Friedman was the big intellectual force behind this view.

Yes. He started out as something of a New Dealer but became a right-wing advocate of the idea that the free market will solve almost all social problems. He thought all you had to do was control money, and there was no way you could really affect the unemployment rate. He was very articulate, especially in journalism and in debates, and his simplistic way of thinking captured minds and hearts at a time of enormous confusion, in the 1970s.

Q.And meanwhile, the financial industry was starting to develop new kinds of securities, derivatives and so on, that would change the nature of investing.

Right. And nobody in Washington started talking about regulating these derivatives. On the contrary, Jimmy Carter - the first really conservative Democrat in economic matters - was very much in favor of deregulation.

Q.Reagan and Bush continued the trend toward deregulation, obviously, but so did Clinton.

Clinton played the game and made matters even worse. His treasury secretaries, Lloyd Bentsen and then Robert Rubin, really believed that Wall Street had the answers – that if we give them their head they will create prosperity in America. They also knew that Wall Street is a place Democrats can get campaign financing. Republicans had lots of other areas of business sewn up, and the Democrats went for entertainment, Silicon Valley, and finance.

Q.So let's turn to the consequences.

The consequence was a misallocation of capital for 40 years. In the 1980s, the S&Ls were deregulated. They made absurd investments for which they had to be bailed out. That's when the corporate takeover movement got crazy, financed by banks and junk bonds, which in turn received tax benefits because the interest was deductible. I think the evidence shows the takeovers mostly wasted money. And then the high-tech fantasies of the 1990s, the WorldComs and Enrons, the enormous accounting frauds, and finally all that wasted money in housing.

Q.Wouldn't free-market types say you have to allow finance to make these mistakes in order to get the benefits of their good investments and of overall growth?

Well, but what happened over this period? There were only a few years here and there where productivity grew rapidly. Capital investment was weak as a proportion of GDP for the most part, except for a few years here and there. And wages as we know basically stagnated. So no, the benefits did not outweigh the costs; we've had enormous waste and then a failure of public investment because taxes have been so absurdly low.

Q.What do you have in mind when you say "failure of public investment"?

A lack of investment across the board – in energy, in new kinds of R&D, new kinds of manufacturing, general public investments in health care and transportation infrastructure, broadband and so forth. I think we're going to see America have a very hard time climbing back to serious prosperity in the future because of this lack of investment.

Q.You call this period an "age of greed" but couldn't you as easily call it an "age of ideology" – of true believers?

Well, you always have to worry when ideology somehow lines your pockets. And I supposed some of them truly believed and some of them still truly believe, but clearly these were large-scale rationalizations, and as greed went unchecked, a climate of greed grew. And greed received approbation. Nobody began to question if you had gigantic houses anymore - once upon a time, people used to be a little bit embarrassed. Now, nobody was embarrassed.

Q.What's your take on the Dodd-Frank financial reforms?

I think Dodd-Frank has some good points, but it's not going to be enforced well, and anyway they're still writing the rules. I think there's been way too much emphasis on "too big to fail." That's really not the issue; the issue is too much speculation, too much leverage and too much incentive to promote investment.

What would you like to see, regulation-wise?

I think we need seriously higher capital requirements, we have to prohibit certain kinds of securities that cannot be truly understood or are very easily given to speculation, like collateralized debt obligations. I think we probably have to limit what big institutions can do – not because of size but because of conflict of interest. And then I think we have to do something which is a no-no in America: We have to recognize that Wall Street is a monopoly, or at least an oligopoly. They get away with charging ridiculous fees – 7 percent for an IPO! – because there's no real competition.

Q.Lastly, what do you make of the deficit fight in Washington?

I think austerity economics now are a disaster in Washington, because we may be facing another recession. We're going to get a very slow recovery – because of private debt, not so much public debt. And I think this argument about balancing the budget right away, right now, will prove to be one of the great follies of American history.

Related: How Alan Greenspan Helped Wreck the Economy (Book Excerpt: Age of Greed)

Read more: http://www.rollingstone.com/politics/blogs/national-affairs/jeff-madrick-on-how-wall-street-won-and-america-lost-20110624#ixzz2AjDEPR10

The Author Speaks

Interview With Jeff Madrick on the U.S. Financial Crisis

'Age of Greed' tells how we wrecked our economy

by: Julia M. Klein | from: AARP Bulletin | May 26, 2011

Our current economic woes result from four decades of bad decisions, Jeff Madrick argues in Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present. Profiling such figures as the conservative economist Milton Friedman, Presidents Nixon, Carter and Reagan, junk-bond king Michael Milken, former Federal Reserve Board chairman Alan Greenspan, and former Citigroup CEO Sandy Weill, Madrick pinpoints the players who he says "took the economy along an unfortunate, tragic path … from which it may not be possible to turn back."

See also: Excerpt from Age of Greed.

Financial greed played a role in the recent U.S. recession. — Tetra Images/Getty Images

Madrick says that the recent recession was caused by anti-government ideology and greed that led to financial deregulation, wasteful investments, overblown Wall Street compensation and outright corruption. A regular contributor to the New York Review of Books, Madrick is editor of Challenge magazine, visiting professor of humanities at the Cooper Union and senior fellow at the Roosevelt Institute and the Schwartz Center for Economic Policy Analysis at the New School.

AARP Bulletin talked to him about his book. 

Q. You argue that we have been living, since 1970, in an age of greed. Is this period unique in American history and, if so, why?

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A. Greed rises and recedes. This was a particularly acute period of greed, comparable to the late 1800s and the 1920s. This age of greed gathered steam over 40 years. My notion of greed is that it will always accelerate unless it is checked by either a strong government or a strong cultural sense of community and cooperation. And both of those have dissolved since the 1970s. The book shows that there wasn't merely an assault on government, but also that the financial community has been seriously misallocating capital.

Q. For example?

A. In the 1980s, there were all kinds of corporate takeovers. These corporate takeovers were made with enormous amounts of debt. The interest on the debt was deductible: The government subsidized the takeovers. Those takeovers, by and large, failed. Some economists say they succeeded, they made us "lean and mean." But they were largely wasteful.

Q. Why did you structure the book as a series of profiles?

A. This history was not inevitable. It was made by people.

Q. Your central argument is that our economic problems are traceable to "a handful of individuals making bad, self-serving decisions." But you also say that ideology and a lack of oversight and regulation made all this possible. How do you reconcile these positions?

A. The individuals were the ones who pushed the ideology. Indeed, the systemic deregulation is a function of individuals. Rarely in the history of any major calamity can blame be laid as justifiably at the feet of only one man as this credit crisis can be laid at the feet of Alan Greenspan. He was so persuasive and influential over the deregulation of finance, and the Fed, his agency, was the main regulator of big banks, and had all kinds of power in other areas, like mortgages.Q. Sandy Weill, the former CEO of Citigroup, seems to epitomize your distaste for the financial community. You note, for example, that the year he saved American Can $8.7 million by forcing retirees to pay for their own health insurance, he paid himself $13 million. What was his justification?

A. Always, even to the very end, he would say that people like him deserved all this money because they saved American capitalism by making it lean and mean, by cutting workers. It's the argument they almost all make. It's almost laughably incorrect. [From] 2001 to 2007, total income grew far more slowly than in any other expansion, and job growth grew far, far more slowly.

Q. Were there voices suggesting that executive compensation and other practices had gotten out of hand?

A. There were certain journalists and financial analysts who kept raising the point that executives and financial people were paid too much. There were executives within the financial firms who warned their superiors and their peers that they were taking too much risk. While everybody kind of knew that housing was overinflated, almost nobody knew that if the housing market collapsed, it could also bring down Wall Street. Mostly the level of debt and the level of risk were not understood.

Q. You say that the period from the 1990s to 2002 was the most corrupt since the 1920s. Can you give some examples?

A. Every respected profession was involved in lying to the public. You could not keep your job at a major investment bank unless you lied about high technology [companies]. You could not keep your job at an accounting firm unless you approved highly dubious accounting. You could not keep your job at a law firm unless you said that the accountants were right.

Q. I was surprised your book didn't mention Bernie Madoff. Wasn't he, too, emblematic of greed and corruption?

A. He was emblematic of a certain kind of culture, but he wasn't emblematic of the crisis itself. He was an outright old-fashioned crook. His fraud reflected the neglect that was common to regulators — I could have used Madoff for that.

Q. Aren't the problems you document also political problems, arising from the failure of American voters to elect representatives with their best economic interests in mind?

A. I think that's true. That reflects that change in ideology that began in the 1970s. When people don't do well, they don't necessarily vote for those who favor social programs. They often blame government. Except for the New Deal, we tend to develop progressive social programs in America only in times of prosperity, like the 1960s, like the late 1800s, the early 1900s. The New Deal would not have occurred without the skills and relative fearlessness of Franklin Roosevelt.

Q. But doesn't the historical pendulum tend to swing back and forth between liberalism and conservatism?

A. I seriously disagree with that. That's a very dangerous notion because [it suggests], "Let's just sit around and wait for the pendulum to swing back." That's really not how American history works. There's a much more active, conscious effort on the part of people to seek social justice. We've had 40 years of financial deregulation and about 11 minutes of re-regulation — that's not a pendulum swing.

Q. What impact will the waste and corruption you document have on Americans 50 and older?

A. There is going to be enormous pressure to cut back retirement programs and health care programs. This will directly affect the elderly, and extremely unfairly so.

Q. You are pessimistic.

A. Yes. The country has badly neglected its transportation infrastructure, its educational system, its energy technology, broadband technology and the availability of jobs to the middle class. These are the foundations for the future.

Q. What specific fixes do you recommend?

A. We have to raise taxes. We have to reinvest in order to create jobs.

Q. What about the current preoccupation with the federal budget deficit?

A. It's been disastrous. Now is when we need government. I always argued that the highest priority for [President] Obama was to show Americans the importance of government — and that it can work for them.

Julia M. Klein is a cultural reporter and critic in Philadelphia and a contributing editor at the Columbia Journalism Review.

http://www.aarp.org/politics-society/history/info-05-2011/interview-jeff-madrick-greed-author-speaks.3.html

Book Review: Age of Greed

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick (New York: Knopf, 2011. 480 pp)

Jeff Madrick is a regular contributor to The New York Review of Books, and former economics columnist for The New York Times. He is an adjunct professor of humanities at The Cooper Union, and senior fellow at the Roosevelt Institute and at the Schwartz Center for Economic Policy Analysis, The New School. He lives in New York City.

The Meltdown 

In any situation, time, or place, an individual’s story is of utmost importance. On person can change the lives of a family, a community, and a country. We can learn more about ourselves and our present conditions when we hear these stories. Jeff Madrick's work, The Age of Greed, compiles the stories of a few influential individuals to explain our current economic crisis.

In this book, Jeff Madrick provides an educational view of how America has transformed from a prosperous nation to a democracy overwhelmed with the pursuit of monetary gain. Madrick argues that the current diminished state of America’s economy resides in the American individual’s primary goal of monetary prosperity.

Madrick argues that increasing self-interest gave rise to the highly unregulated financial system that produced the meltdown of 2008. Unlike current financial analysts who try to point fingers at Bush or Clinton (or a number of other scapegoats as the South Park clip below illustrates), Madrick traces the financial meltdown all the way back to the 1960s, and even to businesses today– a position I rather enjoyed.  Instead of pointing fingers without thinking about it, Madrick traces the problem back to where it began.

Margaritaville
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Since The Age of Greed is quite expansive, it is difficult to give a full synopsis. However, in an attempt to share what I loved about this book, I will summarize a few of these personal stories.

Photo by Liz West

Friedman 

First, I particularly appreciated tracing the root of our financial system to the ideologies of Milton Friedman. When Milton Friedman began teaching his economic theory in the Chicago School of Economics at the University of Chicago, a shift soon occurred in business to a new profit maximization viewpoint that Madrick argues was the beginning of the rise of the age of greed.

“To Friedman, any views that promoted government spending as a way to stabilize economies and promote prosperity were not merely wrongheaded but seen as pandering to the majority by promising more social programs. Moreover, government itself had its own greedy expansionist motives he believed. ‘Ever since the New Deal,’ as Friedman put it, ‘a primary excuse for the expansion of government activity at the federal level has been supposed necessity for government spending to eliminate unemployment’” (39).

As this quote suggests, Friedman pushed a hardline capitalist agenda. He believed that allowing people to purse their creative interests without interference was key to economic stability. I’m not entirely convinced that this philosophy was his prime motive, and Madrick would agree. He states,

“I can only attribute so biased and simplistic a notion in an intelligent man to a strong emotional desire to service his main point: to minimize government” (51).

With a sense of adventure, America desired to perform this task. But, they missed the point; instead of minimizing government to stabilize the economy via capitalism as Friedman suggested, American citizens acted selfishly to obtain more money for themselves. Oops.

Photo by Andres Ubierna

Jack Welch and GE 

Second, society in the 1980s complained that American business was sagging while Japanese business continued to rise due to low wages. So, GE’s CEO Jack Welch decided America’s problem was that,

“Japanese companies focused on quality and long-term grown while American business had focused for too long on maximizing the quantity of goods sold to reduce costs per unit” (180).

In the 1980s, the American population revolted against the quality of American craftsmanship, which was poor due to reduced production costs that raised a company’s net income. Big business was no longer entrepreneurial, and it possessed a newfound desire to

“break down old formulas and past traditions, subverting the discipline of pyramidal bureaucracies, and resurrecting an egalitarian respect between workers and their bosses. Fully valuing workers would lead to higher quality, lower production costs, and more innovative products” (181).

But, this shift never occurred; the steady increase of managerial pay as well as the lack of respect for the worker led to an increased gap between management and laborer. The age of greed, which began with Milton Friedman, actualized.

Photo by DonkeyHotey

The Path that Led to Reagan

The US emerged from the Great Depression with a very tightly regulated financial system, and for a while people liked it that way. However, by the 1970s people grew tired of this boring and safe financial system. By highlighting personal profiles like Jack Welch and Milton Friedman, Madrick recounts the economic turmoil out of which financial overreaching became the norm.

Madrick then argues that at the time Reagan became president, the government had become the principal obstacle to an individual’s personal fulfillment. Reagan states,

“‘I want to help get us back to those fiercely independent Americans...those people who can do great deeds, and I’ve seen them robbed of their independence...because of these great social reforms’” (124). 

Following Reagan (and I am skipping a large portion of the book here) a series of crises occurred including an enormous bank-led crisis and the savings and loan crisis after which the boring Depression-era regulation was gone, and the financial gloves were off, so to speak. The anything-goes financial world created two “bubbles” of which we all know and discuss: the technology bubble, and the recent housing bubble.

Vignettes 

By looking at these personal vignettes, we see some familiar ground: the career of Alan Greenspan, Lehman Brothers, Merrill Lynch, Citibank, and many more. Through these vignettes, Madrick traces what led to the Great Recession. While I find his thesis somewhat unproven, I can see his point of view. He offers some intriguing secondary sources, and convincing rhetoric to prove his point. If Age of Greed wasn’t so dry, I think it would have been an absolutely enthralling read.

Verdict: 3 out of 5

Posted By: Andrew Jacobson

http://wherepenmeetspaper.blogspot.kr/2011/12/book-review-age-of-greed.html