In
September 2008, a global financial crisis was initiated by the bankruptcy of U.S
investment bank Lehman Brothers, and the collapse of the world’s largest
insurance company AIG. (BBC, 2008) The recession left 30 million people
unemployed and cost the world trillions of dollars. (Pollin, 2011)
Weissman
(2008) suggests that much if the blame can be put on dynamics of unregulated
global financial and other markets. Since the 1980s the rise of the financial
sector has led to a series of increasingly severe financial crises. Each crisis
has caused more damage, while the industry has made more and more money.
After
the Great Depression in America, the financial industry was tightly regulated.
Most regular banks were local businesses, prohibited from speculating with
depositors’ savings. Investment banks, which handled stock and bond trading,
were small, private partnerships. (Thomas, 2012)
In
the 1980s the investment banks went public, allowing them to get a huge amount
of shareholders money. (Shleifer & Vishny, 1987) People on Wall Street
started getting rich.
Also
during the 80s, economists and financial lobbyists supported a 30 year period
of financial deregulation. Savings-and-loan companies were deregulated allowing
risky investments, using depositors’ money. Hundreds of saving-and-loan
companies failed, costing taxpayers $124 billion, and cost many people their
life savings. Thousands of executives went to jail for looting their companies.
(Donahue, 2009)
By
the late 1990s the financial sector had merged into a few enormous firms, each
of them so large that their failure could threaten the whole system.
According
to Willem Buiter, (2010) Chief Economist, Citigroup the firms merged together
to create big banks because banks like monopoly power and lobbying power and
also because they know that when they’re too big, and fail, they will be
bailed.
Since deregulation
began, the world's biggest financial firms were caught laundering money,
defrauding customers, and cooking their books. (Rozek, 2011)
On April 22nd, 2008, in the UK, Royal Bank of Scotland announced
a write-down of £5.9bn on the value of its investments between April and June -
the largest write-off yet for a British bank. (BBC, 2009)
On September 7th,
2008, the takeover of Fannie Mae and Freddie Mac was announced, two giant
mortgage lenders on the brink of collapse. (BBC, 2009) Two days later, Lehman
Brothers announced record losses of 3.2 billion dollars. The stability of the
global financial system was in jeopardy and under British law, Lehman's London
office had to be closed immediately. Lehman's failure also caused a collapse in
the commercial paper market, which many companies depend on to pay for
operating expenses, such as payroll. When AIG was bailed out, the owners of its
credit default swaps, the most prominent of which was Goldman Sachs, were paid
61 billion dollars the next day. (New York Times, 2009)
The
AIG bailout cost taxpayers over 150 billion dollars. On October 4th,
2008, President Bush signed a 700-billion-dollar bailout bill. World stock
markets continued to fall, within fears that a global recession was happening.
By December of 2008, General Motors and Chrysler faced bankruptcy. (Zywicki,
2011) Millions of people lost their jobs while the top executives at Lehman
Brothers made over a billion dollars between 2000 and 2007; and lost nothing
when the firm went bankrupt. The CEO of Merrill Lynch, received $90 million in
2006 and 2007 alone. After driving his firm into the ground, he resigned; and
collected 161 million dollars in compensation. (Wernke & Mock, 2009) In the
U.S., the banks are now bigger, more powerful, and more concentrated than ever
before.
Ever since the fall of Lehman Brothers in 2008, it
has been a popular view that banker bonuses are at least partly to blame for
the financial crisis. (Tonks, 2012)
Rajan (2005) focused
on incentive structures that generated huge cash bonuses based on short term
profits, but which imposed no penalties for later loses. Rajan argued that
these incentives encouraged bankers to take risks that might eventually destroy
their own firms or even the entire financial system.
Families
responded to the recession in two ways: by working longer hours, and by going
into debt. For the first time in history, average Americans have less education
and are less prosperous than their parents. When the financial crisis struck
just before the 2008 election, Barack Obama pointed to Wall Street greed and
regulatory failures as examples of the need for change in America. (Brighenti,
2011)
The
Obama administration made no attempt to recover any of the compensation given
to financial executives during the bubble. In 2009, as unemployment hit its
highest level in 17 years, Morgan Stanley paid its employees over 14 billion
dollars; and Goldman Sachs paid out over 16 billion. In 2010, bonuses were even
higher. (The Guardian, 2011) For decades, the financial system was stable and
safe, but then something changed. The financial industry turned its back on
society, corrupted the political system, and forced the world economy into
crisis.
At
enormous cost, we have avoided disaster, and are recovering. But the men and institutions
that caused the crisis are still in power; and that needs to change. They will
tell us that we need them, and that what they do is too complicated for us to
understand. They will tell us it won't happen again. They will spend billions fighting
reform.
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