Business as Usual: The Roots of the Global Financial Meltdown

Notes

Notes 265 Notes Notes to Series Introduction 1. Robert Shiller borrowed Alan Greenspan’s phrase, with some irony, when he pointed to many of these as early as 2000; see Shiller, Irrational Exuberance (Princeton, NJ: Princeton University Press, 2000). 2. Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009). 3. See Daniel Chirot’s account of transformations at Washington Mutual in volume 1. Chirot, “A Turning Point or Business as Usual?” in Business as Usual: The Roots of the Global Financial Meltdown, ed. Craig Calhoun and Georgi Derluguian (New York: NYU Press, 2011), chapter 4. 4. If the motive of mortgage salesmen and the corporations behind them was simply greed, their actions were made possible by the long centrality of homeownership to the “American Dream” of integration into the middle class. This connected private profits to government policy designed to make homeownership more accessible. Ironically, the mortgage industry had long used the infamous policy of “redlining” to restrict loans to minorities on the ground that they lived in high-risk neighborhoods . Now it found ways to profit from the riskiest of mortgages—loans to consumers without a reasonable basis for repaying them—and justified its actions as an effort to extend homeownership more widely. Sadly many of those who were sold these mortgages ended up paying more than if they had rented and lost their savings as well as their houses. Like the 266 mortgage salesmen with whom they worked, developers generally pocketed their profits before this happened. 5. The Federal National Mortgage Association (Fannie Mae) was created in 1938 as part of the New Deal by which the US government under Roosevelt responded to the Great Depression. In 1968, it was privatized (partly in response to financial pressures generated by the Vietnam War) and began to operate as a “government-sponsored enterprise ” (GSE)—essentially a corporation making profits for its investors but benefiting from tax exemption. The Federal Home Loan Mortgage Corporation (Freddie Mac) was created as a GSE in 1970, with a mandate to further expand opportunities for homeownership by making it easier for those making loans to home purchasers to sell them on the secondary market, largely by offering guarantees, subsidies, and liquidity. By supporting the secondary market for mortgages, both Fannie Mae and Freddie Mac played important roles in the current crisis. In 2008, they were placed under government conservatorship when their finances became extremely shaky and they required large infusions of cash from the US government.Taxpayers also pay for the legal defense of their managers against fraud charges. 6. As James K. Galbraith says in volume 3, it was like counterfeiting. Galbraith, “The Great Crisis and the Financial Sector: What We Might Have Learned,” in Aftermath: A New Global Economic Order? ed. Craig Calhoun and Georgi Derluguian (New York: NYU Press, 2011), chapter 10. 7. Tom Wolfe, The Bonfire of the Vanities (New York: Farrar, Straus and Giroux, 1987). 8. There is a substantial literature charting the rise of traders and their gambling culture, from Michael Lewis’s Liar’s Poker: Rising Through the Wreckage on Wall Street (New York: Penguin, 1990) through Gillian Tett’s Fools Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe (New York: Free Press, 2009). Not only were most traders men, women were paid less and more likely to lose their jobs when crisis hit. 9. A version of this danger appeared earlier in the debacle of LongTerm Capital Management. This hedge fund made spectacular gains in its first few years, then lost US$4.6 billion in less than four months after the Russian financial crisis of 1998 made for a sudden contraction in liquidity. Its board members included two economists, Robert C. Merton Notes 267 and Myron Scholes, who had shared the 1997 Nobel Prize for their work on just this issue of pricing derivatives. LTCM was closed in 2000. 10. See her chapter in volume 3. Sassen, “A Savage Sorting of Winners and Losers, and Beyond,” in Aftermath, chapter 1. 11. See respectively the chapters by Daniel Chirot, Beverly Silver and Giovanni Arrighi, Gopal Balakrishnan, and Manuel Castells in volume 1. Chirot, “A Turning Point or Business as Usual?” in Business as Usual, chapter 4 ; Silver and Arrighi, “The End of the Long Twentieth Century,” in...