The financial meltdown on Wall Street
is more than a cyclic correction brought on by a mismanaged business cycle. It is emblematic of a problem at the very foundation
of the right wing economic philosophy that became conventional wisdom during the Bush years -- and would be continued in a
The zealots of unfettered "free markets"
cast aside the critical lesson that the world learned during the Great Depression: left to their own devices, unregulated
financial markets do not necessarily function to benefit the society as a whole -- or, in the end, even many individual market
participants. The fundamental premise of right-wing economics is the incorrect
view that if every market actor pursues his own economic interest, the "invisible hand" of the market place will assure that
the "common good" results. But of course, common sense tells us that is not always true. Two quick examples:
is referred to as the "tragedy of the commons." Suppose an island nation depends on
the fishing harvests from the surrounding sea for its livelihood. It would obviously be in the interest of the community never
to take more fish from the sea than can be replenished through the reproduction of fish. That way, everyone on the island
will continue to have fish for the long haul. But it is in the interest of each
individual fisherman to catch as many fish as he can. This is especially true if the fish stocks grow scarcer. To continue
to have enough fish for himself and his family, each fisherman competes more and more vigorously for the remaining fish. In
the end, this behavior will assure that the fish supply is depleted, and that no one has any fish. In this situation, if everyone pursues his own individual interest, the common good is not served. But
if everyone looks out for each other, and recognizes that all have a common group interest, they will manage the fish resource
to assure a self-sustaining fish supply that can feed everyone for years to come.
The other example is the classic
case of economic recession. In a recession, it is in each economic actor's self-interest to increase his savings and cut spending,
since the recession threatens his income. But by each pursuing his own individual interest, all of the actors together reduce
the economy's overall spending. And that deepens the recession. If, on the other hand, the entire group of economic actors
works through its government to increase national spending and reduce overall savings, it will stimulate the economy and the
recession will end -- benefiting everyone.
The American mortgage market now
provides us with another clear example of how this fundamental premise of right-wing economic thought is dead wrong. For many years after the Great Depression, most mortgages were provided by banks
and savings and loans. Traditionally these institutions would originate their own loans, evaluate the risk, and maintain a
relationship with the borrower. It was in the self-interest of the institution to make loans -- that's how it made money.
But it was also in the institution's interest to assure that the borrower could pay the loan back, because it was lending
its own money.
Over the last thirty years, the mortgage
market has fundamentally changed. Now most loans are originated by brokers or other mortgage companies who make their money
through "origination fees" and often payments from big, unregulated lenders. Once these loans are made, they are then packaged
and sold as securities through the secondary mortgage market. Mortgage originators
had every incentive to make all the loans they could, but absolutely no incentive to assure that the borrowers could pay the
loans back. Credit standards were relaxed, new "sub prime" products were introduced, "no-document" loans were issued.
This system provided a great deal
of liquidity to the mortgage industry. But it also removed the risk of making the loan from the loan originator and handed
it to a huge, diffuse "market." No longer did any individual or institution have any individual incentive to prevent bad loans.
The problem was simultaneously hidden and exaggerated by the creation of complex derivatives -- securities that sliced and
diced the risk and allowed it to be sold and resold. As long as housing prices
went up, the problem of bad loans were hidden by the rising equity of the collateral -- the homes that were being financed.
But once prices stopped rising and began to drop, the bottom fell out. Left to its own devices, the mortgage market itself
could not solve this problem. It was in the loan originator's interest to issue more and more risky loans and it wasn't in
the interest of any individual market player to control for risk, since the securities representing that risk could be sold
a minute after they were purchased.
The only solution to this problem
would have been the kind of regulation that was put into place for banks during the New Deal. With banks and with savings
and loans, regulators guarantee a substantial portion of the depositor's money, but they also ensure that the mix of loans
and the bank's overall financial structure is sound. Today the major source of mortgage capital is not banks or savings and
loans, but from financial institutions that are almost free of regulation. The same went for the two institutions that were
set up to create this "secondary mortgage market," Fanny Mae and Freddie Mac, before they were taken over by the government
last week. The kind of regulation that was necessary was opposed by the Bush administration -- and the entire right wing business
and economic establishment -- that is trying desperately to hold onto power by electing John McCain to continue the Bush presidency. So now the chickens are coming home to roost. The taxpayers are helping to bail out
some of the players, the stock market is tanking, mortgages are harder to get -- further reducing home values and making the
And unbelievably, John McCain told
his audience that he would "clean up Wall Street." John McCain's chief economic adviser is Phil Gramm -- a former economics
professor -- who is now Vice Chair of UBS, a huge international financial company. He's the guy who said that the problems of the American economy were "in the
minds" of the American people -- that we are "a nation of whiners." Gramm is an ardent advocate of precisely the right wing
economic philosophy that caused this problem in the first place. Gramm and McCain
believe in letting the guys with all the money do pretty much what they want because, they say, it will ultimately benefit
us all. They are the ultimate crusaders for "trickle down economics."
The problem is that the foundational
principles of this economic view have been proven wrong by history. And after a while, the victims are no longer limited to
the vast majority of Americans that has suffered for the last eight years -- the pain even spreads to the wealthiest denizens
of Wall Street. As Barack Obama said yesterday, we hear a lot about the benefits of the economy "trickling down;" now we're
beginning to see the pain of the economy "trickle up."
The central lesson of this saga is
clear. If you like the Bush economy, hire McCain. Over the next seven weeks, however, Americans who care about our economic
future have to join Barack Obama in saying: enough.
Robert Creamer is a long-time
organizer and political strategist, and the author of the recent book "Stand Up Straight: How Progressives Can Win,"