Betting on a Global Crapshoot
by Steve Weissman,
t r u t h o u t | Perspective
You have to hand it to Wall Street. It wreaks havoc on the global economy, and the rest of us - as taxpayers - prop it
up so that it can do it all over again.
We give the Wall Street banks trillions of dollars in bailout money, and they still fail to do their job, which is to
loosen credit and provide the liquidity that businesses and consumers need. A major hedge fund - Cerberus Capital -
plays chicken with President Obama in his effort to save Chrysler. Bankers spend millions lobbying to stop Congress from
providing help to homeowners facing foreclosure. And, having failed to stop a Credit Card Bill of Rights in the House of
Representatives, the banksters now aim to kill it in the Senate.
Because Bank of America, CitiBank, AIG, Goldman Sachs and the others are "too big to fail," Treasury Secretary Tim
Geithner continues to redistribute astronomical sums of money from taxpayers to these giants of finance capitalism. And,
predictably, they use our money to remain too big to fail as they extend their power in the most predictable ways.
Thanks to us, the taxpayers, bankers still "own" the US Senate, as Sen. Dick Durbin (D-Illinois) put it. Thanks to us,
the insurance companies and health maintenance organizations still have the clout to keep single-payer health care "off
the table." And thanks to us, the huge financial supermarkets like CitiBank can still block a reenactment of anything
like the New Deal's Glass-Steagall Act, which kept the high-rollers in investment banks from gambling with "the people's
savings" in commercial banks. For those who forgot, Wall Street pushed the repeal of Glass-Steagall in 1999.
Why so many Americans put up with - and pay for - Wall Street's continued power, I will never understand, for all the
easy ideological answers. I only know that Wall Street's power remains a fact of life, and not just for the United
States. Kept alive by taxpayer dollars and government printing presses, the finance capitalists on Wall Street fully
expect to continue shaping the global economy in their own image, exporting to the world the same high-risk derivatives
that created the present crisis.
Derivatives come in many flavors, from currency futures that minimize the risks of international trade to the credit
default swaps on which the failed insurance giant AIG owed billions of dollars that it could not pay. Some derivatives,
such as crop futures, go back at least as far as the ancient Greeks. Others depend on modern computers, instantaneous
global communications, and revolutionary breakthroughs in mathematics, such as the work on determining the value of
derivatives that brought Robert Merton and Myron Black the Nobel Prize for Economics in 1997. Some derivatives pose no
serious threat except to those who bet on them. Others can be, in Warren Buffet's prophetic words, "financial weapons of
mass destruction, carrying dangers that, while now latent, are potentially lethal."' Buffet said this in 2002, and we
are now living through precisely the dangers he predicted.
The problem should be obvious. From farming the land to building a better mousetrap, all economic activity entails some
degree of betting - on when it will rain, how the market will respond, or other factors beyond control. The truly
dangerous derivatives, though ostensibly designed to manage risks, involve betting on a complex series of other bets. A
local bank bets that a homeowner will pay off her mortgage. An investor bets that a package of mortgages will pay
appreciably more than he has to pay. Other investors bet on an index of packaged mortgage prices. And so the uncertainty
grows, to the point that even the most brilliant investors with the fanciest mathematical models have no way of knowing
how much risk they are taking. And neither have the governments who would regulate them.
Before the current crisis, this global crapshoot had grown into a multitrillion-dollar industry, depending on which
derivatives are included and how they are valued. The financial engineering of these derivatives is one of the major
fields in which the United States holds a comparative advantage internationally, and Wall Street and its defenders
eagerly promote how much of a contribution these products could make to America's balance of payments. Purely in
economic terms, this potential would prove alluring to policy-makers, no matter who sits in the Oval Office. But key
members of President Obama's economic team, such as Tim Geithner and former Treasury Secretary Larry Summers, seem
especially unlikely to suggest reforms and regulations that would seriously tie Wall Street's hands in exporting
American-style finance capitalism.
To their credit, many on Wall Street and their friends in government have accepted the inevitability of increased
regulation of the entire financial services industry, including the "shadow banking system" of investment banks and
insurance companies. But the defenders of financial engineering insist on remaining free to create ever more complex
derivatives, with all the incalculable risks they pose to the global economy. Will Obama and the Democratic-led Congress
leave Wall Street with the freedom to rule and ruin? Or will wiser heads prevail? The debate has only just begun.
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A veteran of the Berkeley Free Speech Movement and the New Left monthly Ramparts, Steve Weissman lived for many years in London, working as a magazine writer and television producer. He now lives and works in France.